-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, ExuC0HPYtRcN6lWsbMKY0/t7XtNQYvYnZDxXGPik6Zfvx/AHHQMBgY/hq4md2o8T WSLjtbGm/BpSXE1WngBupw== 0000950123-01-503980.txt : 20010702 0000950123-01-503980.hdr.sgml : 20010702 ACCESSION NUMBER: 0000950123-01-503980 CONFORMED SUBMISSION TYPE: 20-F PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010629 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PARADIGM GEOPHYSICAL LTD CENTRAL INDEX KEY: 0000931131 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 000000000 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 20-F SEC ACT: SEC FILE NUMBER: 000-29538 FILM NUMBER: 1670956 BUSINESS ADDRESS: STREET 1: GAV-YAM CENTER NO.3 STREET 2: 9 SHENKAR STREET CITY: ISRAEL STATE: L3 ZIP: 46120 BUSINESS PHONE: 2818763473 MAIL ADDRESS: STREET 1: TWO ALLEN CENTER STREET 2: 1200 SMITH STREET STE 2100 CITY: HOUSTON STATE: TX ZIP: 77002 20-F 1 y50410e20-f.txt PARADIGM GEOPHYSICAL LTD. 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 20-F [ ] REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934 OR [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2000 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________ to __________ Commission file number 0-29538 PARADIGM GEOPHYSICAL LTD. (Exact name of Registrant as specified in its charter and translation of Registrant's name into English) ISRAEL (Jurisdiction of incorporation or organization) GAV-YAM CENTER NO. 3, 9 SHENKAR ST., P.O. BOX 2061, HERZLIA B 46120 ISRAEL (Address of principal executive offices) Securities registered or to be registered pursuant to Section 12(b) of the Act: NONE (Title of Class) Securities registered or to be registered pursuant to Section 12(g) of the Act. ORDINARY SHARES, NOMINAL VALUE NIS 0.5 PER SHARE (Title of Class) Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act. NONE (Title of Class) Indicate the number of outstanding shares of each of the issuer's classes of capital or common stock as of the close of the period covered by the annual report: As of December 31, 2000, the Registrant had outstanding 14,691,902 Ordinary Shares, nominal value NIS 0.5 per share. Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceeding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2)has been subject to such filing requirements for the past 90 days. [X] Yes [ ] No Indicate by check mark which financial statement item the Registrant has elected to follow: [ ] Item 17 [X] Item 18 2 PART I Unless the context otherwise requires, all references in this annual report to "Paradigm, "we", "our", and "us" refer to Paradigm Geophysical Ltd. and its consolidated subsidiaries. References to "dollars" or $ are to United States dollars. ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS Not applicable. ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE Not applicable. ITEM 3. KEY INFORMATION A. SELECTED FINANCIAL DATA We have derived the selected consolidated income statement data and the consolidated balance sheet data presented below as of and for the years ended December 31, 1996, 1997, 1998, 1999 and 2000 from our audited consolidated financial statements. Our historical consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States and are presented in dollars. The information presented below is qualified by our audited consolidated financial statements and notes set forth in Item 18 of this annual report. You should read the selected financial data in conjunction with our consolidated financial statements and notes thereto and Item 5. "Operating and Financial Review and Prospects." 1 3 CONSOLIDATED INCOME STATEMENT DATA
YEARS ENDED DECEMBER 31, ------------------------ 1996 1997 1998 1999 2000 ---- ---- ---- ---- ---- REVENUES: (IN THOUSANDS, EXCEPT PER SHARE DATA) Products ................................... $ 7,718 $ 19,979 $ 38,074 $ 43,023 $ 46,390 Services ................................... 3,884 4,886 7,288 11,483 16,908 -------- -------- -------- -------- -------- TOTAL REVENUES ..................... $ 11,602 $ 24,865 $ 45,362 $ 54,506 $ 63,298 -------- -------- -------- -------- -------- YEAR-TO-YEAR % CHANGE .......... 114.3% 82.4% 20.2% 16.1% OPERATING EXPENSES: Cost of products ........................... $ 2,450 $ 5,070 $ 8,559 $ 12,418 $ 10,816 Cost of services ........................... 1,539 1,849 3,107 5,804 6,352 Research and development ................... 1,466 4,728 7,660 9,306 11,215 Selling, general and administrative ........ 9,536 9,744 15,822 20,638 23,518 Depreciation ............................... 997 2,012 2,298 3,865 4,746 Amortization ............................... 1,040 1,185 2,347 3,064 3,360 Non recurring expenses ..................... -- 10,676 -- 2,705 -- -------- -------- -------- -------- -------- TOTAL OPERATING EXPENSES ................. $ 17,028 $ 35,264 $ 39,793 $ 57,800 $ 60,007 -------- -------- -------- -------- -------- OPERATING INCOME (LOSS) ..................... (5,426) (10,399) 5,569 (3,294) 3,291 Financial income (expenses), net ........... 57 (446) (661) (484) (552) -------- -------- -------- -------- -------- INCOME (LOSS) BEFORE INCOME TAXES ........... (5,369) (10,845) 4,908 (3,778) 2,739 Income tax ................................. -- -- 356 -- 380 -------- -------- -------- -------- -------- NET INCOME(LOSS) ............................ $ (5,369) $(10,845) $ 4,552 $ (3,778) $ 2,359 -------- -------- -------- -------- -------- BASIC EARNINGS (LOSS) PER SHARE ............... $ (2.33) $ (4.66) $ 0.66 $ (0.31) $ (0.17) WEIGHTED AVERAGE NUMBER OF ORDINARY SHARES USED IN COMPUTATION OF BASIC EARNINGS (LOSS) PER SHARE .................................... 2,300 2,328 6,850 12,205 13,504 DILUTED EARNINGS (LOSS) PER SHARE ............. $ (2.33) $ (4.66) $ 0.49 $ (0.31) $ (0.17) WEIGHTED AVERAGE NUMBER OF ORDINARY SHARES USED IN COMPUTATION OF DILUTED EARNINGS(LOSS) PER SHARE .................................... 2,300 2,328 9,306 12,205 13,789
2 4 SELECTED CONSOLIDATED BALANCE SHEET DATA
AS OF DECEMBER 31, ------------------ 1996 1997 1998 1999 2000 ---- ---- ---- ---- ---- (IN THOUSANDS) CASH AND CASH EQUIVALENTS ...................... $ 7,113 $ 8,229 $ 3,463 $ 5,457 $ 8,647 WORKING CAPITAL(DEFICIENCY) .................... $ 7,958 $ (692) $ 9,154 $ 15,346 $ 10,860 TOTAL ASSETS ................................... $ 19,383 $ 47,883 $ 46,135 $ 66,165 $ 79,761 CURRENT DEBT ................................... $ 1,193 $ 1,288 $ 2,228 $ 5,073 $ 8,186 NOTE PAYABLE ................................... $ 0 $ 9,500 $ 0 $ 0 $ 0 BRIDGE LOAN PAYABLE ........................... $ 0 $ 12,000 $ 0 $ 0 $ 0 LONG TERM DEBT (EXCLUDING CURRENT MATURITIES) .. $ 367 $ 483 $ 39 $ 4,665 $ 1,483 TOTAL SHAREHOLDERS' EQUITY ..................... $ 12,885 $ 2,640 $ 26,697 $ 35,468 $ 46,469 CASH FLOW DATA CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES $ (1,658) $ 1,633 $ (1,773) $ (889) $ 12,628 CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES $ (2,436) $(11,594) $ (4,516) $(15,401) $ (9,442) CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES $ 10,734 $ 11,077 $ 1,674 $ 18,868 $ (126)
3 5 B. CAPITALIZATION AND INDEBTEDNESS Not applicable C. REASONS FOR THE OFFER AND USE OF PROCEEDS Not applicable D. RISK FACTORS We believe that the occurrence of any or some combination of the following factors could have a material adverse effect on our business, financial condition and results of operations. IF ACTUAL EXPENDITURES BY OUR CUSTOMERS VARY FROM THEIR ANTICIPATED EXPENDITURES, OUR BUSINESS, RESULTS OF OPERATIONS AND FINANCIAL CONDITION MAY BE MATERIALLY ADVERSELY AFFECTED. Our business and operations are substantially dependent upon the condition of the global oil and gas industry. The oil and gas industry is highly cyclical and has been subject to significant economic fluctuations at various times as a result of numerous factors affecting the supply of and demand for oil and natural gas, including the level of capital expenditures of the oil and gas industry, the level of drilling activity, the level of production activity, market prices of oil and gas, worldwide economic conditions, interest rates and the cost of capital, environmental regulations, tax policies, political requirements of national governments, coordination by the Organization of Petroleum Exporting Countries ("OPEC"), market behavior of oil producers who are not members of OPEC, cost of producing oil and natural gas, and technological advances. The budgets of our customers, who are principally oil and gas exploration and production companies and companies that provide data processing services to these companies, vary with the state of each customer's financial condition, the opportunities identified by it for the use of its resources, and its expectations of future short- and medium-term financial performance. While surveys are published that are indicative of expected budget expenditures of oil and gas exploration and production companies, there is a significant variance in actual expenditures by individual companies, sub-segments of the oil and gas industry, and the industry as a whole. In addition, fluctuations in the international price of oil may also affect the planned budget expenditures of our customers. Consequently, there may be significant variations in time lags of our customers in adjusting the level of expenditure to correspond to their short- and medium-term outlook regarding the impact of the international oil price on their performance. If actual expenditures by our customers vary from their anticipated expenditures, whether as a result of fluctuations in the international price of oil, or otherwise, our business, results of operations and financial condition may be materially adversely affected. 4 6 IF WE ARE UNABLE TO COMPETE EFFECTIVELY IN THE MARKETPLACE, WE MAY SUFFER A DECREASE IN MARKET SHARE, REVENUES AND PROFITABILITY. Competition in our industry is intense and we expect competition to increase. Some of our competitors are divisions or subsidiaries of companies that have greater financial and other resources, greater name recognition, and more extensive and diversified operations than we do. We compete with Geoquest, a division of Schlumberger Ltd. and Landmark Graphics Corporation, a subsidiary of Halliburton Co. in regard to the provision of software solutions and products. In addition, we compete with Western Geco, a joint-venture between Schlumberger Ltd. and Baker Hughes Inc. and Compagnie Generale de Geophyisique, one of our major shareholders, and Veritas DGC Inc. and others in the seismic data processing and analysis services industry. We also face competition from a number of much smaller companies that provide products that serve niche portions of our markets and from small service bureaus providing seismic data processing and analysis services. Current and potential competitors have established, and may establish in the future, cooperative relationships among themselves or with third parties to increase their ability to address the needs of prospective customers. Accordingly, new competitors or alliances among competitors may emerge and acquire market share. As a result, our competitors may be able to adapt to new or emerging technologies and changes in customer requirements, and our larger competitors may be able to devote greater resources to the promotion and sale of their products. We cannot guarantee that we will be able to compete effectively against current or future competitors or that competitive pressures will not harm our financial results. OUR SUCCESS DEPENDS ON OUR ABILITY TO CONTINUALLY ENHANCE AND MARKET TECHNOLOGICALLY SOPHISTICATED PRODUCTS AND SERVICES. We believe that our future success will largely depend upon our ability to continue to enhance our existing products and services and to successfully develop and market and introduce new products and services to meet the requirements of our customers. We are currently devoting significant resources to refining and expanding the range of products and services offered by us to our customers. We cannot assure you that we will be successful in developing and marketing new solutions that respond adequately to technological change. Our present or future products and services may not satisfy the evolving needs of the oil and gas industry. In addition, if we are unable to anticipate or respond adequately to the demands of our customers, due to resource, technological or other constraints, our business and results of operations could be materially adversely affected. WE MAY SEEK TO EXPAND OUR BUSINESS THROUGH ACQUISITIONS THAT COULD RESULT IN DIVERSION OF RESOURCES AND EXTRA EXPENSES, WHICH COULD DISRUPT OUR BUSINESS AND HARM OUR FINANCIAL CONDITION. We have pursued, and may continue to pursue, acquisitions of business, products and technologies, or the establishment of joint venture arrangements, that could expand our business. For example, in October 2000, we acquired the Flagship software division from Compagnie Generale de Geophysique, and in April 2001 we acquired the GeoScene(R) product line from 5 7 Oilfield Systems Limited. In addition, in May 2001, we acquired Sysdrill Limited, a provider of software solutions for drilling engineering and well operations. The negotiation of potential acquisitions or joint ventures and the integration of an acquired or jointly developed business, technology or product could cause diversion of management's attention from the day-to-day operation of our business. Future acquisitions could result in: - potentially dilutive issuances of equity securities; - the incurrence of debt and contingent liabilities; - amortization of goodwill and other intangibles; - research and development write-offs; and - other acquisition-related expenses. We may also acquire other companies where we believe that we can acquire new products or services or otherwise enhance our market position or strategic strengths. However, there can be no assurance that suitable acquisition candidates can be found, that potential acquisitions can be consummated on terms favorable to us, or that the Flagship, GeoScene(R) or Sysdrill acquisitions will significantly enhance our products or strengthen our competitive position. Acquired business or joint ventures may not be successfully integrated with our operations or with our technology. In addition, we may not receive the intended benefits of the acquisition or joint venture. IF WE FAIL TO ATTRACT AND RETAIN SKILLED EMPLOYEES, WE WILL NOT BE ABLE TO IMPLEMENT OUR BUSINESS STRATEGY OR OPERATE OUR BUSINESS EFFECTIVELY. Our products require highly qualified personnel for research and development, sales and marketing, software programming and technical customer support and services. Our success depends in large part on our ability to attract, train, motivate and retain highly skilled scientists and technology professionals, including geologists, geophysicists, petrophysicists, drilling and reservoir engineers, mathematicians and software programmers. Qualified personnel in these areas are in demand and are likely to remain a limited resource for the foreseeable future. Our ability to expand our business is dependent upon our success in recruiting such personnel and our ability to manage and coordinate our worldwide development efforts. We may be unable to continue to attract and retain the skilled employees we require and any inability to do so could adversely impact our ability to manage and complete our existing projects and to compete for new customer contracts. In addition, the resources required to attract and retain such personnel may adversely affect our operating margins. The failure to attract and retain qualified personnel may have a material adverse effect on our business, results of operations and financial condition. 6 8 Our success also depends, to a certain extent, upon the continued active participation of a relatively small group of senior management personnel who have been with us, or with the companies we have acquired, for many years. The loss of the services of some or all of these employees could have a material adverse effect on our business. OUR REVENUES AND OPERATING RESULTS MAY VARY FROM QUARTER TO QUARTER, INCLUDING AS A RESULT OF THE FOLLOWING: - the size, timing and efficient execution of significant service projects; - the size and timing of orders for software products; - increased competition; - timing of software product releases; - delays in execution and acceptance of significant service projects by customers; - changes in expenses; - changes in our strategy; - personnel changes; - foreign currency exchange rates; - factors impacting on the oil and gas industry expenditure decisions; and - general economic and political factors. Due to the relatively fixed nature of certain of our costs, a decline of revenue in any quarter would result in lower profitability for that quarter. BECAUSE SUBSTANTIALLY ALL OF OUR REVENUES ARE GENERATED INTERNATIONALLY, OUR RESULTS OF OPERATIONS COULD SUFFER IF WE ARE UNABLE TO MANAGE INTERNATIONAL OPERATIONS EFFECTIVELY. During 2000, approximately 60% of our revenues were generated from customers in North America, Europe, the Middle East and Africa and the balance of our revenues were derived from customers in the former Soviet Union, the Asia-Pacific region, China and Latin America. Our strategy is to continue to broaden our existing customer base in the different regions in which we operate and to expand into new international markets. The expansion of our existing international operations and entry into additional international markets will require significant management attention and financial resources. We maintain development facilities in Israel, the United States, Australia, Russia, France, the United Kingdom and Canada, and we have sales and operations offices and service centers in North America, Europe, Latin America, China and the Asia-Pacific region. In addition, conducting our business internationally subjects us to certain risks including: 7 9 - legal and cultural differences in the conduct of business; - longer payment cycles than is customary in developed economies; - increased risk of collection; - burdens that may be imposed by tariffs and other trade barriers; - staffing and managing international foreign operations; - burden of compliance with laws and regulations of a wide variety of countries ; - immigration regulations that limit our ability to deploy our employees; - political instability; and - potentially adverse tax consequences. One or more of these factors could have a material adverse effect on our international operations. FLUCTUATIONS IN EXCHANGE RATES MAY ADVERSELY AFFECT OUR BUSINESS. Although most of our revenues are denominated in U.S. dollars, approximately 70% of our operating costs are incurred outside the United States. As a result, fluctuations in exchange rates between the currencies in which these costs are incurred and the U.S. dollar may have a material adverse effect on our results of operations and financial condition. The cost of our operations in the different counties in which we operate, as expressed in U.S. dollars, could be adversely affected by the extent to which any increase in the operating costs in the local currency of those countries is not offset (or is offset with a time delay) by a devaluation of the currencies in those countries in relation to the U.S. dollar. As a result of this differential, from time to time we experience increases in the costs of our operations in the countries in which we operate, as expressed in U.S. dollars, which could in the future have a material adverse effect on our results of operations and financial condition. Where we believe it appropriate we limit these exposures by entering into specific hedging transactions. However, hedging transactions may not enable us to avoid exchange-related losses, and our business may be harmed by exchange rate fluctuations. The imposition of exchange or price controls or other restrictions on the conversion of foreign currencies could also have a material adverse effect on our business, results of operations and financial condition. IF WE ARE UNABLE TO ADEQUATELY PROTECT OUR INTELLECTUAL PROPERTY OR BECOME SUBJECT TO A CLAIM OF INFRINGEMENT, OUR BUSINESS MAY BE MATERIALLY ADVERSELY AFFECTED. Our success and ability to compete depend substantially upon our internally developed technology. Any misappropriation of our technology could seriously harm our business. We 8 10 regard a substantial portion of our software products and systems as proprietary and rely on a combination of statutory and common law copyright, trademark and trade secret laws, customer licensing agreements, employee and third party non-disclosure agreements and other methods to protect our proprietary rights. Our software includes license manager mechanisms to prevent or inhibit unauthorized use but these can be violated by sophisticated users. We generally enter into confidentiality agreements with our employees, consultants, customers and potential customers and limit access to and distribution of proprietary information. Despite our efforts to protect our intellectual property rights, unauthorized parties may attempt to bypass our license manager, copy or otherwise obtain our software or technology or to develop software with the same functionality. We cannot be certain that the steps we have taken will prevent misappropriation particularly in those foreign countries where the laws may not protect our intellectual property to the same extent as the laws of the United States. If we have to resort to legal proceedings to enforce our intellectual property rights, the proceedings may be burdensome and expensive and may involve a high degree of risk. These events could seriously harm our business. Although we have not received any notices from third parties alleging infringement claims, third parties could claim that our current or future products or technology infringe their proprietary rights. Any such claim of infringement by a third party could cause us to incur substantial costs defending against the claim, even if the claim is invalid, and could distract our management from our business. Furthermore, a party making such a claim could secure a judgment that requires us to pay substantial damages. A judgment could also include an injunction or court order that could prevent us from selling the software product concerned. Any of these events could seriously harm our business. WE CURRENTLY PARTICIPATE IN OR RECEIVE TAX BENEFITS FROM GOVERNMENT PROGRAMS. THESE PROGRAMS REQUIRE US TO MEET CERTAIN CONDITIONS AND THESE PROGRAMS AND BENEFITS MAY BE TERMINATED OR REDUCED IN THE FUTURE. We receive benefits from certain Israeli government investment incentive programs and tax benefits. For example, we receive tax benefits under Israeli law for capital investments that are designated as "Approved Enterprises". To maintain our eligibility for these programs and tax benefits, we must continue to meet certain conditions. If we fail to comply with these conditions, the tax benefits received could be cancelled and/or we could be required to refund tax benefits already received. Additionally, some of these programs and the related tax benefits are available to us for a limited number of years, and these benefits expire from time to time. Any of the following could have a material affect on our business, financial condition and result of operations: - some programs in which we participate may be discontinued; - we may be unable to meet the requirements in order to continue to qualify for some programs; 9 11 - these programs and tax benefits may be unavailable in the future, either at all, or at their current levels; or - upon expiration of a particular benefit, we may not be eligible to participate in a new program or qualify for a new tax benefit that would offset the loss of the expiring tax benefit or we may be required to refund previously accredited tax benefits if we are found to be in violation of the stipulated conditions. For more information, see Item 10. "Additional Information - Taxation". FROM TIME TO TIME, OUR SOFTWARE MAY CONTAIN UNDETECTED ERRORS, PRODUCT DEFECTS OR SOFTWARE ERRORS. THIS MAY CAUSE US TO EXPERIENCE A DECREASE IN MARKET ACCEPTANCE AND USE OF OUR SOFTWARE PRODUCTS AND WE MAY BE SUBJECT TO WARRANTY AND OTHER LIABILITY. Our software products are highly complex and may, from time to time, contain design defects or software errors that may be difficult to detect and correct. This may cause delays in software product releases or damage customer satisfaction and may have a material adverse effect on our business, results of operations and financial condition. Since our products are generally used by our customers to perform important business functions, design defects, software errors, misuse of our products, incorrect data from external sources or other potential problems within or out of our control may arise from the use of our products, and may result in financial or other damages to our customers. Our failure or inability to meet a customer's expectations in providing products or performing data processing and interpretation projects may result in the termination of our relationship with that customer or could give rise to claims against us. Although we have agreements with our customers that contain provisions designed to limit our exposure to potential claims and liabilities arising from the type of problems described, these provisions may not effectively protect us against such claims in all cases. Claims and liabilities arising from customer issues could damage our reputation, resulting in loss of existing or future customers or loss of or delay in revenue. These events may adversely affect our business, results of operations and financial condition. WE MAY BE ADVERSELY AFFECTED BY POLITICAL AND ECONOMIC CONDITIONS IN ISRAEL. We are organized under the laws of the State of Israel. However, as of December 31, 2000, only approximately 17% of the Company's total staff, our principal research and development facility and the Company's principal executive offices were located in Israel. Our operations, financial condition and results of operations are directly influenced by economic, political and military conditions in and affecting Israel. We could be adversely affected if major hostilities break out in the Middle East or if trade involving Israeli origin goods and services is curtailed. Any future armed conflicts or political instability in the region could negatively affect our business or harm our results of operations. We cannot predict whether a full resolution of these problems will be achieved, the nature of any such resolution or any consequences that any of these factors may have on us. The peace process between Israel and the Palestinian Authority has seriously deteriorated due to the recent increased violence between Palestinians and Israelis. Continued hostilities between the Palestinian community and Israel and any failure to settle the conflict may have a material adverse effect on our business. Further deterioration of hostilities 10 12 into a full scale conflict might require more widespread military services by some of our employees which may have a material adverse effect on our business. Israeli companies and companies doing business with them have been subject to an economic boycott initiated by the Arab countries. Some of the companies that are significant suppliers of hydrocarbon products are located in countries that may very well participate in boycotts of products and service of Israeli origin. This boycott and policies may harm our operating results or the expansion of our business. OUR SHARE PRICE HAS FLUCTUATED AND COULD CONTINUE TO FLUCTUATE SIGNIFICANTLY. The market for our ordinary shares, as well as the prices of shares of other oilfield services companies and technology companies, has been volatile. A number of factors, many of which are beyond our control, may cause the market price of our ordinary shares to fluctuate significantly, such as: - fluctuations in our quarterly revenues and earnings and those of our publicly held competitors; - shortfalls in our operating results from the levels forecast by securities analysts; - public announcements concerning us or our competitors; - changes in pricing policies by us or our competitors; - market conditions in our industry; and - the general state of the publicly traded securities market . We have no control over any of these matters and any of them may adversely affect our business internationally. In addition, trading in shares of companies listed on the Nasdaq National Market in general and trading in shares of technology companies in particular has been subjected to extreme price and volume fluctuations that in some cases have been unrelated or disproportionate to operating performance. These broad market and industry factors may depress our share price, regardless of our actual operating results. IT MAY BE DIFFICULT TO ENFORCE A U.S. JUDGMENT AGAINST US, OUR OFFICERS AND DIRECTORS AND OUR ISRAELI AUDITORS OR TO ASSERT U.S. SECURITIES LAW CLAIMS IN ISRAEL. Service of process upon our directors and officers and our Israeli auditors may be difficult to effect in the United States because almost all these parties reside outside the United States and a substantial portion of our assets and the assets of these persons are located outside the United States. Any judgment obtained in the United States against such parties may be unenforceable within the United States. 11 13 It is not clear whether civil liabilities under the Securities Act and the Securities Exchange Act can be enforced in Israel. However, subject to time limitations, Israeli courts may enforce a U.S. judgment in a civil matter, if: - the application for enforcement was filed within five years after the judgement; - adequate service of process has been effected and the defendant has had a reasonable opportunity to be heard; - the judgment and its enforcement are not contrary to the law, public policy, security or sovereignty of the State of Israel; - the judgment was rendered by a court of competent jurisdiction, in compliance with due process and the rules of private international law prevailing in Israel; - the judgment was not obtained by fraudulent means and does not conflict with any other valid judgment in the same matter between the same parties; - no action between the same parties in the same matter is pending in any Israeli court at the time the lawsuit is instituted in a U.S. court; and - the U.S. courts are not prohibited from enforcing judgments of the Israeli courts. PROVISIONS OF ISRAELI LAW MAY DELAY, PREVENT OR MAKE MORE DIFFICULT AN ACQUISITION OF OUR COMPANY, WHICH COULD DEPRESS OUR SHARE PRICE. Provisions of our Articles of Association restricting business combinations with interested shareholders and provisions of Israeli law may delay, prevent or make difficult an acquisition of our company, which could prevent a change of control and therefore depress the price of our stock. Israeli corporate law regulates mergers and acquisitions of shares through tender offers in certain circumstances, requires special approvals for transactions involving significant shareholders and regulates other matters that may be relevant to these types of transactions. For details see Item 10. - "Anti-Takeover Provisions; Mergers and Acquisitions under Israeli Law." In addition, Israeli tax law treats certain acquisitions, particularly stock-for-stock swaps between an Israeli company and a foreign company, less favorably than United States tax law. Israeli tax law may, for instance, subject a shareholder who exchanges his company shares for shares in a foreign corporation to immediate taxation. 12 14 ITEM 4. INFORMATION ON THE COMPANY A. HISTORY AND DEVELOPMENT OF THE COMPANY Paradigm Geophysical Ltd. was incorporated and registered in Israel in 1987 under the laws of the state of Israel as a company with limited liability, under the name G.T. Graphic Technology Ltd. We changed our name to Paradigm Geophysical Ltd. in October 1993. Our principal executive offices are located at Shenkar St. 9, Gav Yam Center No.3, Herzlia 46120, Israel and our telephone number is + 972-9-9709300. Our agent in the United States is Paradigm Geophysical Corp. and its principal offices are located at Two Allen Center, 1200 Smith Street, Suite 2100, Houston, TX 77002. Our global business is conducted through subsidiaries and representative offices in several locations worldwide and aims to provide technical information solutions, including software products and product-driven services to companies involved in the exploration and production of oil and gas and to oilfield service companies. DEVELOPMENTS SINCE JANUARY 1, 2000 In October 2000, we acquired the Flagship reservoir interpretation and characterization software business division of Compagnie Generale de Geophysique for a purchase price of approximately $14 million comprising cash and ordinary shares of Paradigm. The acquisition of the Flagship business included Integral Plus and Stratimagic products, which are widely installed worldwide and provide significant additions to Paradigm's reservoir interpretation and characterization product line. In April 2001, we acquired all the rights to the GeoScene(R) product line and related customer services from Oilfield Systems Limited. This product suite strengthens the range of products and services that we offer in the field of geological interpretation. In May 2001, we acquired Sysdrill Limited, a Scottish company, for a cash consideration and ordinary shares of Paradigm. Sysdrill is one of the leading software and service providers of drilling engineering and well operations solutions. Our principal capital expenditures for 2000 was for computer and peripheral equipment, resulting in a significant expansion in computer capacity for services. B. BUSINESS OVERVIEW We provide technical information solutions for the oil and gas industry worldwide consisting of software solutions and services to companies involved in the exploration and production of oil and gas and to oilfield service companies. We provide integrated, scientifically advanced productivity solutions, technical services, data processing services and reservoir studies services for reservoir description. Our products include: 13 15 - SOFTWARE SOLUTIONS - Software products and add-on packs, designed to accommodate a customer's technical workflows, for analysis of hydrocarbon prospects. - TECHNICAL SERVICES - On-site support, post contract support and technical training designed to complement our software solutions in order to maximize the added-value of the customer investment in our software solutions. - DATA PROCESSING SERVICES - Advanced seismic data processing based on our software solutions and our seismic data analysis experts. - RESERVOIR STUDIES SERVICES - Advanced reservoir characterization and simulations services and integrated studies based on our software solutions and our interpretation and reservoir characterization experts. We operate a global network of sales, users' support and services with 21 offices in 17 countries, serving all major oil-and gas-producing provinces in the world. THE OIL AND GAS INDUSTRY BACKGROUND Our business and operations are substantially dependent upon the condition of the global oil and gas industry. The oil and gas industry is highly cyclical and has been subject to significant economic fluctuations at various times as a result of numerous factors affecting the supply of and demand for oil and natural gas, including the level of capital expenditures of the oil and gas industry, the level of drilling activity, the level of production activity, market prices of oil and gas, worldwide economic conditions, interest rates and the cost of capital, environmental regulations, tax policies, political requirements of national governments, coordination by the Organization of Petroleum Exporting Countries ("OPEC"), market behavior of oil producers who are not members of OPEC, cost of producing oil and natural gas, and technological advances. Crude oil prices remained at or near record highs throughout 2000. As oil and gas prices were significantly above the price levels assumed for their budgets, oil companies achieved higher profits and greater cash flows than expected. This did not fully translate into additional capital investment. Investments made by oil and gas companies were predominantly to improve production efficiency on existing prospects, or on the purchase of producing assets and reserves, primarily gas opportunities in North America. The merger and consolidation activities of a number of large customers over the past two years has affected the demand for products and services. The companies that have merged continue to evaluate their oil and gas properties, refining and distribution facilities, and organizations. This evaluation process has translated into a short-term reluctance to undertake new investments in non core-business activities. However, the second half of 2000 reflected increased exploration and production investment , particularly in North America. Although there can be no assurances, we believe that this trend will continue in 2001 on an international scale. Over the longer term we believe 14 16 that rising populations in many countries and greater industrialization efforts will continue to propel worldwide economic expansion, especially in developing nations and that these factors will result in increasing demand for oil and gas needed for refined products and petrochemicals. OUR PRODUCTS In line with the technological advances in the geoscience knowledge industry and a changing focus in the use of high-end geoscience solutions for hydrocarbon exploration and production, in 2000, we redefined our solutions based on our existing product modules and the product modules acquired by us in recent acquisitions. - MORE PETROPHYSICS AND GEOLOGY: We have enhanced our product suite through further integration, and the addition of new tool-sets, such as the geological solutions from the Flagship acquisition, and new petrophysical and geological modules from Chevron and TotalFinaElf. - MORE KNOWLEDGE FROM EXISTING DATA: We have introduced the concept of "interoperability" -- a computer science development that permits our solutions to use all the corporate prospect data bases in whatever format they exist and without the need to reformat or undertake large "data management" efforts. - NEW WORKFLOWS: We have combined our software modules into industry-standard cost-effective workflows. While these are offered as the seven primary industry-standard workflows, our integrated software is structured such that any combination of modules can be tailor-made for workflows specific to the analysis needs for each prospect. - EXPANDED GLOBAL SERVICE CAPACITY: We have expanded our global service capacity with additional super computer power in Houston and expanded staff in Asia Pacific, the CIS and Latin America, to meet the demand for out-sourced seismic data processing. - RESERVOIR STUDIES: We have expanded our service offering to include reservoir studies -- the search for the smaller reservoirs within the larger producing fields. We currently offer the following software workflow solutions: - SEISMIC DATA PROCESSING & IMAGING SOLUTIONS for customers that are using our products for production seismic data processing. This solution integrates Focus(R) and Geodepth(R) Power and Probe products. - SEISMIC DATA ANALYSIS AND QUALITY CONTROL SOLUTIONS for customers that are using our products for the analysis of seismic data and quality control of data processing, based on Geodepth(R) Power, Probe(TM), Vanguard(TM) and Earthstudy(TM) workflows and supplying workflows for interpretive AVO (amplitude with offset), attribute analysis, seismic modeling and velocity analysis in an integrated environment. 15 17 - PROSPECT GENERATION INTERPRETATION SOLUTIONS for customers that are using our interpretation products for rapid, production-oriented generation of prospects. This solution combines our latest visual data management and large volume roaming with the new Reservoir Navigator(TM), SeisX(TM) and Voxelgeo(TM), for prospect generation, with workflows from Stratimagic(R) for seismic facies classification, and Geoscene(R) for geological interpretation. - RESERVOIR EVALUATION INTERPRETATION SOLUTIONS for customers that are using our products for quantitative interpretation and delineation of the reservoir framework. This uses the capabilities of Reservoir Navigator(TM), Voxelgeo(TM), SeisFacies(TM), Nexmodel(TM) and Geosec(TM) workflows. - RESERVOIR CHARACTERIZATION & SIMULATION SOLUTIONS for customers that are using our products for analysis and modeling of reservoir properties using seismic data inversion, petrophysical analysis and rock physics in our Vanguard(TM), GeoLog(TM), Stratimagic(R) and Voxelgeo(TM) based workflows. - PETROPHYSICAL ANALYSIS & ROCK PHYSICS SOLUTIONS for customers that are using our products for analysis and modeling of rock properties based on Geolog(TM), for formation evaluation and petrophysical analysis. - WELL PLANNING & DRILLING SOLUTIONS for customers that are using our products for well planning, drilling design and monitoring. We have integrated our geological and geophysical solutions with Sysdrill's engineering solutions. The introduction of the Sysdrill product line and DirectorGeo(TM) move our solutions further downstream into the well operations area and provide a critical link between drilling engineering, well planning and the geosciences. We offer the following service solutions: Our eleven service centers worldwide offer the skills and knowledge of specialist and experienced geoscientists in partnership with our customer's expert teams, together with super computing resources utilizing our software solutions. - SEISMIC DATA IMAGING SERVICES- for customers that require production seismic data processing services we offer delivery of large-scale seismic data imaging projects. - RESERVOIR STUDIES SERVICES- for customers that require integrated reservoir studies services we offer quality delivery of large-scale integrated studies and reservoir characterization and simulation projects. 16 18 CUSTOMER SUPPORT We employ geoscientists and computer scientists to provide installation and training, online support, on-call problem prevention and resolution and on-site troubleshooting. On-line product support enables customers to download product enhancement and support packs and product documentation and to submit technical support incident reports or questions to the customer support group. We have initiated on-line discussion forums. We provide our customers with optional post-contract maintenance and support agreements, which are renewable annually. A typical software license agreement provides the customer's first year of support in conjunction with the initial purchase of the software license. Most of our customers have entered into post-contract maintenance and support agreements, which entitles them to receive product updates as well as professional and technical support. MARKETING AND SALES We market and sell our products and services to the oil and gas industry, primarily through local sales offices, and to a lesser extent, sales agents and representatives in a small number of markets in which we do not have a regional or local sales presence. Our local offices are staffed with a sales force, technical experts and operating managers. Our sales and marketing strategy is to maintain and enhance our local presence in the markets in which we operate by acquiring significant in-house knowledge of local geology and local hydrocarbon conditions and local markets. We engage in a variety of marketing activities, including: - conducting high level educational workshops and seminars in several locations worldwide to demonstrate the application of our products and to upgrade the end users skills and efficiency in the use of our products; - participating in regional trade shows showcasing our technology at customized demonstration booths; - encouraging our technical staff to present papers at technical conferences; - participating in all major industry events worldwide; and - advertizing on a regular basis in trade and technical magazines. RESEARCH AND DEVELOPMENT, PATENTS AND LICENSES ETC. We believe that significant investment in research and development is essential to maintaining our technological expertise in the market for geoscience knowledge solutions for the oil and gas industry, and to our strategy of being a leading provider of innovative geoscience software products and services. Net research and development expenses were $7.7 million, $9.3 million, $11.2 million in 1998, 1999 and 2000, respectively. 17 19 Three major new products have been launched by us since October 1997 - Probe, Vanguard and GeoSec3D - and all of our products have been enhanced and upgraded to provide new analysis features and, in some cases, re-engineered, to keep pace with changes in computing sciences and graphics manipulation. In addition, our acquisitions have also added several new technologies and products to our range of products and solutions. Because of the open-architecture expected by the industry we have enabled our software to work on our competitors' data bases and to interact with our competitors' software. We also provide our customers with tool-kits that permit the incorporation of their proprietary workflows and algorithms into our software. Recent industry restructuring has resulted in a significant downsizing of the research and development staff in several oil companies, many of whom now look to companies like Paradigm for technology cooperation. In 2000, we signed Technology Cooperation agreements with Chevron and TotalFinaElf. These two agreements allow us to incorporate the results of Chevron and TotalFinaElf research and field testing of specialized geological analysis and well-logging into our software for the benefit of the entire industry. Our research and development efforts are focused both on the immediate competitiveness of our current solutions and products and on expected leading edge requirements and competitiveness over the next several years. We believe that our product development sights must be set far ahead not only to anticipate industry requirements, but to ensure that today's products remain viable over the long run, thereby providing continuing added value to our customers. Research and development continues to be managed as an integrated global team with eight centers, Israel, Houston, Paris and Pau, Aberdeen, Moscow, Brisbane and Calgary. Each center has its areas of specialization and expertise whilst product commercialization, integration and delivery are the responsibility of the research and development group in Israel. As of December 31, 2000, our research and development department consisted of 137 employees. INTELLECTUAL PROPERTY We believe that our patents, trademarks and other intellectual property rights are an important factor in maintaining our technological advantage, although no one patent is considered essential to our success. Typically, we will seek to protect our intellectual technology in all jurisdictions where we believe that the cost of such protection is warranted. While we have patented certain key technologies, we have not patented all of our proprietary technology even where we regard such technology as patentable. We also protect our intellectual property and trade secrets through confidentiality agreements with staff and customers. We have licensed certain technology from third parties, including software which is integrated with Paradigm-developed software and which we use in our service centers. CUSTOMERS AND COMPETITION Our installed base of customers consists of approximately 500 customers and about 4,500 user licenses, representing a full range of the high-end users in the industry. In 2000, no single customer represented more than 5% of our revenues. 18 20 In certain aspects of our activities we are both a supplier and a competitor with our peer group in the oilfield service companies. The oilfield service industry is lead by three conglomerates, Schlumberger, Halliburton and Baker Hughes which provide vertically-integrated oilfield services including drilling, well completion and hardware infrastructure. Schlumberger and Halliburton own and operate substantial geoscience and data management software divisions, respectively, Geoquest, a division of Schlumberger Ltd. and Landmark Graphics Corporation, a subsidiary of Halliburton Co. We compete with these two companies and a number of smaller niche technology providers in connection with providing geoscience software solutions. Seismic data acquisition, processing and analysis are provided by several large companies amongst whom are Westerngeco, a joint-venture of Schlumberger and BakerHughes, Compagnie Generale Geophysique a major shareholder in Paradigm and Veritas DGC Inc. We compete with these companies and a range of smaller companies in relation to the provision of seismic data processing services and, to a lesser extent, in connection with services related to reservoir studies. We compete with companies that have longer operating histories, larger customer bases, substantially greater financial, technical, sales, marketing and other resources, and greater name recognition than us. Current and potential competitors have established, and may establish in the future, cooperative relationships among themselves or with third parties to increase their ability to address the needs of prospective customers. New competitors or alliances among competitors may emerge and acquire significant market share. As a result, our competitors may be able to adapt to new or emerging technologies and changes in customer requirements, and our larger competitors may be able to devote greater resources to the promotion and sale of their products and services. There can be no assurance that we will be able to compete successfully with existing or new competitors. Failure by us to adapt to changing market conditions and to compete successfully with established or new competitors may have a material adverse effect on our results of operations and financial condition. 19 21 GEOGRAPHICAL AND OPERATIONAL DISTRIBUTION OF REVENUES Set forth below is a summary of our revenues by category and our total revenues in the major geographical regions in which we operate.
REVENUES - PRODUCTS 2000 1999 1998 $'000 $'000 $'000 North and South America 21,289 16,582 18,893 Europe, Africa, Middle East 14,804 11,881 9,116 Far East and China 10,297 14,560 10,065 ------- ------- ------- TOTAL $46,390 $43,023 $38,074 ------- ------- ------- REVENUES - SERVICES North and South America 10,815 7,637 2,828 Europe, Africa, Middle East 4,436 2,723 3,846 Far East and China 1,657 1,123 614 ------- ------- ------- TOTAL $16,908 $11,483 $ 7,288 ------- ------- ------- REVENUES - TOTAL North and South America 32,104 24,219 21,721 Europe, Africa, Middle East 19,240 14,604 12,962 Far East and China 11,954 15,683 10,679 ------- ------- ------- TOTAL $63,298 $54,506 $45,362 ------- ------- -------
C. ORGANIZATIONAL STRUCTURE Set forth below is a list of our significant subsidiaries, each of which is wholly owned: - Paradigm Geophysical Corp., incorporated in the State of Delaware - Paradigm Geophysical (R&D) Corp., incorporated in the State of Delaware - Paradigm Geophysical (UK) Limited, incorporated in the United Kingdom - Paradigm Geophysical (Europe) Limited, incorporated in the United Kingdom - Paradigm Geophysical (Services) Limited, incorporated in the United Kingdom - Paradigm Geophysical Canada Ltd., incorporated in Canada - Paradigm Geophysical Pty Ltd. incorporated in Australia - PT Paradigm Geophysical (Indonesia), incorporated in Indonesia - Paradigm Geophysical Pte Ltd., incorporated in Singapore 20 22 - Paradigm Geophysical BV, incorporated in The Netherlands - Paradigm Geophysical de Venezuela, incorporated in Venezuela - Paradigm Geophysical SA, incorporated in Argentina - Paradigm Geophysical do Brasil LTDA, incorporated in Brazil - Paradigm Geophysical Holdings EURL, incorporated in France - Paradigm Geophysical (France) SA, incorporated in France - Paradigm Geophysical (Hungary) Group Financing LLC, incorporated in Hungary 21 23 D. PROPERTY PLANTS AND EQUIPMENT Our headquarters are located in Herzlia, Israel. Set forth below is a summary of locations of our principal facilities, the facility activities and their square footage for our continuing operations:
LOCATION ACTIVITIES FLOOR AREA SQ.FT Herzlia, Israel Corporate HQ 30,601 R&D Houston, Texas Sales office 34,217 Service center R&D Woking, U.K. Sales office 13,000 Service center Massy, France Sales office 12,471 R&D Moscow, Russia Sales office 9,081 Service center R&D Calgary, Canada Sales office 8,016 Service center R&D Perth, Australia Sales office 6,553 Service center Brisbane, Australia R&D 6,004 Aberdeen, Scotland Sales office 5,000 R&D
In addition to the above principal facilities we also lease premises in Beijing, Jakarta, Bahrain, Caracas, Buenos Aries, Rio de Janeiro, Pau and Almaty. We believe that the facilities we currently occupy are suitable and adequate for our current needs. If we expand our operations further than we currently anticipate, we may need additional space. 22 24 ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS Statements in this Annual Report concerning our business outlook or future economic performance; anticipated revenues, expenses or other financial items; introductions and advancements in development of products, and plans and objectives related thereto; and statements concerning assumptions made or expectations as to any future events, conditions, performance or other matters, are "forward-looking statements " as that term is defined under the United States Federal Securities Laws. Forward-looking statements are subject to risks, uncertainties and other factors which could cause actual results to differ materially from those stated in such statements. Factors that could cause or contribute to such differences include, but are not limited to, those set forth under "Risk Factors" in this Annual Report as well as those discussed elsewhere in this Annual Report and in our other filings with the Securities and Exchange Commission. The following discussion and analysis is based on and should be read in conjunction with our consolidated financial statements, including the related notes contained in Item 18. A. OPERATING RESULTS OVERVIEW We provide technical information solutions to the leaders of the oil and gas industry worldwide, offering software solutions and product-driven services to companies involved in the exploration and production of oil and gas and to oilfield service companies. Our business solution comprises scientifically advanced software solutions, technical services, data processing services and reservoir studies services. Our products include: - SOFTWARE SOLUTIONS - Software products and add-on packs, designed to accommodate a customer's technical workflow for analysis of hydrocarbon prospects. - TECHNICAL SERVICES - On-site support, post-contract support and technical training designed to complement our software solutions in order to maximize the added value of the customer investment in our software solutions. - DATA PROCESSING SERVICES - Advanced seismic data processing based on our software solutions and our seismic data analysis experts. - RESERVOIR STUDIES SERVICES - Advanced reservoir characterization and simulations services and integrated studies based on our software solutions and our interpretation and reservoir characterization experts. We operate a global network of sales, users' support and services with 21 offices in 17 countries, serving all major oil-and gas-producing countries in the world. 23 25 MARKET CONDITIONS IN 2000 Our results in 2000 should be viewed within the context of the developments and trends in the market in which we operate, i.e. the oil field services market. This market is, in turn, directly impacted by the overall macroeconomics of oil and gas supply and demand, international oil prices, and the spending patterns of oil and gas companies. Despite predictions by industry analysts that capital spending by oil and gas companies on exploration and production would increase in early 2000, expenditures in those areas only started to increase in the second half of 2000. Spending by oil and gas companies during the first half of the year appears to have been concentrated mostly on production enhancement investments and related activities. International oil prices remained at or near record highs throughout 2000, resulting in higher profits and cash flows of oil and gas companies than forecasted. Generally, these unanticipated profits and cash flows appear to have been primarily allocated by the major oil and gas companies to items such as the trading of hydrocarbon assets and investments that improve returns on capital, such as improving production efficiency on existing prospects and on the purchase of producing assets and reserves. IMPACT ON PARADIGM While there was a demand for our software products and services in 2000, it did not meet our anticipated forecast of orders for products and services during the first half of 2000. Activity in the latter half of 2000 confirmed that the oil and gas companies were extensively re-analyzing archive data for their planned 2001 and beyond field development programs, and reanalyzing newly purchased library data. Our service operation benefited from this activity, as many oil and gas companies outsourced the analysis of archive data to companies that provide seismic data analysis services. INDUSTRY TRENDS AND THEIR SIGNIFICANCE FOR FUTURE MARKET DEVELOPMENT There is a shortage of skilled geoscience-knowledge staff to provide reservoir-related data analysis and interpretation and we believe that this will create an increased demand for more effective workflows by oil and gas companies. Within the seismic data processing market, the trend that is emerging is a return to proprietary seismic surveys, and we believe that there will consequently be an increase in seismic 4D and 4C surveys. This may increase the demand for out-sourced services for analysis of seismic surveys, well-logs, and for integrated reservoir studies. There is an increasing emphasis by oil exploration companies on looking for "new oil" in existing fields, requiring "high resolution" structural interpretation solutions. This may increase the demand for geological and petrophysical solutions to complement geophysical analysis and integrated reservoir studies. Higher oil and gas prices are expected to result in the allocation of budget resources to improve returns on existing investments and investment in new prospects based on high expected returns. This may increase capital expenditure by oil and gas companies. 24 26 The scarcity of drillable prospects is an increasing concern to operators, especially in North America. Consequently, we believe there will be a corresponding increase in exploration spending in 2001, which is a continuation of the trend seen in 2000. This is in contrast to the emphasis placed by oil and gas companies in 1999 on production related investments. This trend may also increase capital expenditure by oil and gas companies. We expect that exploration activity will increase in areas of difficult geological structures such as sub-salt and ultra deep sea. Exploration in this type of difficult geological terrain may increase the demand for high value-added services, such as depth inversion and AVO seismic data processing with volume and structural interpretation solutions, integrated with petrophysical and geological data and related model building. Expected increases in seismic budgets and the increasing availability of high-quality multi-client data may increase the demand by the operating companies for this data. This could result in increased spending in 2001, and beyond, on data analysis and interpretation services for data acquired in 2000 (or before) and for data from new surveys or data purchased during 2000 and 2001. 25 27 ACQUISITIONS The PTM acquisition - March 1999 On March 31, 1999, we acquired the assets of the Petroleum Technologies Division of Mincom, or "PTM", a privately held Australian company for $8.4 million in cash. The primary product asset is GeoLog(TM), a well-log and petrophysics analysis program. PTM's financial results were consolidated with those of Paradigm commencing in the second quarter of 1999. The Flagship Acquisition - October 2000 On October 4, 2000, we acquired the Flagship reservoir interpretation and characterization software business division of Compagnie Generale de Geophysique ("CGG") for a purchase price of approximately $14.1 million, comprised of cash and ordinary shares of Paradigm. As a consequence of the transaction, CGG acquired approximately 10.1% of our outstanding shares and is therefore an important strategic industry partner in our business. The Flagship business included the Integral Plus and Stratimagic products, which are widely installed worldwide and provide significant additions to Paradigm's reservoir interpretation and characterization product line. We also took over a staff of 80 employees, mainly in France, which included management, product development, sales, customer support and consulting expertise for reservoir studies. We believe that the Flagship acquisition will significantly expand our current customer base. We are in the process of integrating the operations of Flagship with our business. ACQUISITIONS IN 2001 In April 2001, we acquired all the rights to the GeoScene(R) product line and related customer services from Oilfield Systems Limited. We believe that this product suite will further strengthen our products and service offerings in geological interpretation. In May 2001, we acquired Sysdrill Limited, a Scottish company, for cash and ordinary shares of Paradigm. Sysdrill is one of the leading software and service provider of drilling engineering and well operations solutions. We believe that the acquisition of Sysdrill will allow us to combine our technologies with those of Sysdrill in order to offer technical solutions that integrate geoscience knowledge with drilling and well operations solutions. THE FINANCIAL IMPACT OF THE FLAGSHIP ACQUISITION The acquisition was accounted for using the purchase method of accounting. The fair market value of Flagship's assets and liabilities have been included in our balance sheet as of October 4, 2000. Pursuant to an acquired technology valuation obtained in connection with the acquisition, an independent specialist valued the Flagship technology acquired from CGG at $3.4 million, by applying the income approach method, which considers the present value of prospective earnings that will be generated from the software. This amount is being amortized over ten years. Pursuant to the acquired technology valuation, the customer base of Flagship was valued at $ 2.4 million by applying the avoided cost approach, and is being amortized over twenty years. The workforce-in-place was valued at $1.2 million using the cost approach, and is 26 28 being amortized over ten years. The goodwill in connection with the Flagship business is valued at $ 7.1 million and is being amortized over twenty years. . Flagship's financial results were consolidated into our financial results, commencing in the fourth quarter of 2000. The Flagship financial results had a negative impact on our net income for the fourth quarter of 2000. The full impact of efficiency gains through the integration of various regional operations is expected to take up to twelve months from the date of the acquisition. The following table sets forth for the fiscal years ended December 31, 2000, 1999 and 1998, our consolidated statements of operations reflected as a percentage of total revenues:
1998 1999 2000 ---- ---- ---- REVENUES: Products 83.9% 78.9% 73.3% Services 16.1% 21.1% 26.7% ----- ----- ----- TOTAL REVENUES 100.0% 100.0% 100.0% ----- ----- ----- OPERATING EXPENSES: Cost of products 18.9% 22.8% 17.1% Cost of services 6.8% 10.6% 10.0% Research and development 16.9% 17.1% 17.7% Selling, general and administrative 34.9% 37.9% 37.2% Depreciation 5.1% 7.1% 7.5% Amortization 5.2% 5.6% 5.3% Non recurring expenses 0.0% 5.0% 0.0% ----- ----- ----- TOTAL OPERATING EXPENSES 87.8% 106.1% 94.8% ----- ----- ----- OPERATING INCOME (LOSS) 12.3% (6.0%) 5.2% Financial income (expenses), net (1.5%) (0.9%) (0.9%) ----- ----- ----- INCOME (LOSS) BEFORE INCOME TAXES 10.8% (6.9%) 4.3% Income tax 0.8% 0.0% 0.6% ----- ----- ----- NET INCOME(LOSS) 10.0% (6.9%) 3.7% ----- ----- -----
The results of operations for the year ended December 31, 2000 described above and elsewhere in this annual report include 12 months of operations of Paradigm, consolidated with three months of post-acquisition operations (October through December) of Flagship. The results of operations for the year ended December 31, 1999 described in this annual report include 12 months of operations of Paradigm consolidated with nine months of post-acquisition operations (April through December) of PTM. We believe that the contribution of Flagship and PTM products and operations, and their integration with our activities, cannot be adequately portrayed in a typical year-by-year discussion. As a consequence, the financial results described in this annual report for these 27 29 periods are not directly comparable. Note 1 to our audited financial statements for the year ended December 31, 2000 includes the pro-forma unaudited results of operations of Paradigm and Flagship for the year ended December 31, 1999 and 2000 assuming that the Flagship acquisition had been completed on January 1, 1999 and January 2000, respectively, and pro-forma unaudited combined results of operations of Paradigm and PTM for the years ended December 31, 1998 and 1999, as if the PTM acquisition had been completed on January 1, 1998 and 1999, respectively. Where we have considered it relevant to an understanding of our results of operations for the years ended December 31, 1998, 1999 and 2000, we have referred to the consolidated pro forma results. REVENUES Our revenues are derived mainly from the sale of software licenses and related maintenance and support contracts and from providing seismic data processing and reservoir studies services. In choosing to market both products and services, we aim to diversify revenue sources to try to minimize risk in seasonal and regional downturns. Maintenance and support revenues also provide a predictable revenue stream. Total revenues in 2000 increased by 16% over 1999. Assuming that the Flagship acquisition had not been completed on October 4, 2000, total revenues in 2000 would have increased by 11% over 1999. If the pro-forma total revenues in 1999 (i.e. assuming that the PTM acquisition had been completed as of January 1, 1999) are compared to the total revenues in 2000 (without taking into account Flagship), total revenues increased by 7% over 1999. Total revenues in 1999 increased by 20% over 1998. This increase is 9% when comparing pro-forma 1999 total revenues to pro-forma 1998 total revenues (assuming that the PTM acquisition had been completed as of January 1 1999 and 1998, respectively). In 2000, the relative proportion of revenues derived from services increased to 27% of total revenues compared to 21% of total revenue in 1999 and 16% in 1998. This increase was due both to the organic growth in service revenues on a year-over-year basis, and the relative slowdown in growth in product revenues in 2000 and 1999. PRODUCTS This revenue category includes the sale of perpetual licenses for software usage, and the annual maintenance and support charges for this software and the occasional sale of hardware. See note 2g to our consolidated financial statements for details of our accounting policy on revenue recognition of products. Product revenues in 2000 increased by 8% over 1999. Within the limits of the analysis of pro-forma estimates and assuming that the Flagship acquisition had not been completed as of December 31, 2000 and assuming that the PTM acquisition had been completed as of January 1, 1999, pro-forma product revenues would have decreased by 2% in 2000 over 1999. Product revenues in 1999 increased by 13% over 1998. Within the limits of the analysis of pro-forma estimates and assuming that the PTM acquisition had been completed as of January 1, 1998, pro-forma product revenues would have increased by 2% in 1999 over 1998. 28 30 Both 1999 and 2000 product revenues are influenced to different extents by the impact of the one-time turnkey project, which included hardware and software and on-going maintenance revenues. Turnkey project revenues were $1.7 million in 2000 and $6.7 million in 1999. Product sales in 2000 were characterized by the increase in purchases of advanced interpretation, visualization, and reservoir characterization solutions as stand-alone solutions and also as add-ons to the existing installed base of our products and those of our competitors. In 2000, there was a decline in purchases of seismic data processing software, which we attribute to the industry's move to increased outsourcing of high-end processing. The Flagship business acquired in October 2000 contributed $ 2.8 million of total product revenues in 2000, constituting 6% of total product revenues for the year. SERVICES The services revenue category includes seismic data processing and reservoir studies services. See note 2g of our consolidated financial statements for details of our accounting policy on recognition of revenues from services. Revenues from services increased by 47% over 1999, which was 58% higher than in 1998. In 2000, we continued to capture a significant share of the outsourcing demand for high-end seismic data processing services in the US and other international markets. To meet the increase in demand for high-end seismic data processing services and to provide for faster turn-around time for large surveys, in 2000, we continued to invest in our service business, increasing computer capacity and expertise in the US, Latin America, the former Soviet Union and the Asia Pacific region. We currently operate 13 service centers worldwide. REGIONAL DISTRIBUTION OF REVENUES The following table presents the geographic distribution of our revenues:
% Segment Revenue 1998 1999 2000 ---- ---- ---- PRODUCTS North and South America 50% 39% 46% Europe, Middle East and Africa 24% 28% 32% Asia and Pacific 26% 33% 22% --- --- --- 100% 100% 100% SERVICES North and South America 39% 67% 64% Europe, Middle East and Africa 53% 23% 26% Asia and Pacific 8% 10% 10% --- --- --- 100% 100% 100%
29 31 The changes in regional distribution of revenues for the period 1998 to 2000 for our two revenue segments reflects the changing regional economic situation, the oil price crisis, the merger activity in oil companies, and the regionally differential growth in outsourcing demand. The table demonstrates the importance of our global presence as a significant contributing factor to our revenue growth, as well as the geographic risk-balancing achieved by maintaining a presence in multiple markets and a wide customer spread. REGIONAL PRODUCTS REVENUE DISTRIBUTION In 1998, regional product revenues were affected by the Asia and Russian economic crises. In 1999, and to some extent in 2000, regional revenues in North America and Europe were impacted by the downturn in the spending of the major oil companies, while in relative terms, the regional markets where the national oil companies dominate, recovered earlier than did the home markets of the majors. The relatively higher proportion of revenues in 1999 derived from Asia reflects the impact of the large turn-key project for a seismic data processing center discussed above. REGIONAL SERVICES REVENUE DISTRIBUTION Our regional distribution is primarily influenced by the significantly larger size of the computer installation in the U.S. than in any other region, and the rapid growth of this center in 1999 and 2000.The 1998 economic crisis impacted on revenues derived from the Asia-Pacific region and the former Soviet Union, while the North Sea remained a comparatively strong market. With the purchase of the super computer at the commencement of 1999, our position in the U.S. market improved substantially, at the time when the oil price crisis impacted most severely on demand for services in the North Sea and Asia-Pacific region. Recovery of energy prices (and particularly gas prices in the U.S.) had a positive impact on the growth of our services revenues derived from customers in the U.S. and also contributed to the relative growth of our services revenues in Latin America and the former Soviet Union. OPERATING COSTS COST OF REVENUES:
(US $ millions) 1998 1999 2000 ------- ------- ------- PRODUCT COSTS $ 8.6 $ 12.4 $ 10.8 year-over-year increase 45% -13% ------- ------- ------- SERVICES COSTS $ 3.1 $ 5.8 $ 6.4 year-over-year increase 87% 10% ------- ------- ------- TOTAL COSTS $ 11.7 $ 18.2 $ 17.1 year-over-year increase 56% -6% ------- ------- -------
30 32 GROSS MARGINS
(US $ millions) 1998 1999 2000 ------- ------- ------- PRODUCT MARGIN $ 29.5 $ 30.6 $ 35.6 % margin 71% 77% ------- ------- ------- SERVICES MARGIN $ 4.2 $ 5.7 $ 10.5 % margin 49% 62% ------- ------- ------- GROSS MARGIN $ 33.7 $ 36.3 $ 46.1 % margin 67% 73% ------- ------- -------
Product costs is comprised of software production and distribution costs, personnel costs associated with providing maintenance and support, hardware costs for turnkey solutions and the maintenance of production equipment. Service costs is comprised of personnel costs associated with providing services, cost of materials and the maintenance of equipment. The material differences between 2000 and 1999 in connection with the components of our cost of revenues are attributable to: - PRODUCTS: the lower levels of hardware expenses in 2000 ($0.5 million compared to $4.3 million in 1999) due to the completion of the turnkey project in early 2000, which resulted in a favorable improvement in product margins; and - SERVICES: improved services margins, reflecting the improved staff efficiency and data throughput resulting from larger capacity computing installations. Looking forward, we expect that product margins to continue at about the 2000 level, in the absence of further turnkey projects. However, as our installed base of customers grow, we expect a larger proportion of our revenues to be generated from maintenance and customer support and a resulting increase in the direct cost of supporting this installed base. Consequently, in the future, we expect a reduction of product margins, taking into account the growing installed base's support costs in the product cost structure. We expect future service margins to be impacted by two factors: - - the expected difficult labor markets for high caliber geoscience staff that we need to recruit in order to deliver our service solutions; and - - the lowering of costs of computing hardware, which permits increased computing power and wider deployment with increased staff efficiency. 31 33 RESEARCH AND DEVELOPMENT EXPENSES
(US $ millions) 1998 1999 2000 ---- ---- ---- RESEARCH AND DEVELOPMENT EXPENSES $7.7 $9.3 $11.2 As % of Total Revenue 17% 17% 18% year-over-year increase 21% 20% ---- ---- ---- YEAR-END RESEARCH AND DEVELOPMENT 90 98 137 STAFF year-over-year increase 9% 40%
Research and development expenses consist primarily of salaries and other related expenses and the cost of facilities. In 2000, expenditures on research and development were held to almost the same proportion of total revenues as in 1999 and 1998, with minimal expansion of the core staff, and the addition in the fourth quarter of 2000 of additional research and development staff as part of our acquisition of the Flagship business. Research and development continues to be managed as an integrated global team with centers in our Israel headquarters, Houston, Aberdeen, Paris and Pau, Moscow, Brisbane and Calgary. Each center has its areas of specialization and expertise. The global Research and development function is managed and coordinated at our corporate headquarters in Israel, which is also responsible for the integration and commercialization of product releases. 1999 and 2000 were characterized by increasing costs of highly skilled research and development staff worldwide, although to varying degrees. This was most evident in Israel, where we compete with other technology companies in order to attract highly skilled employees. Competition for high caliber research and development staff is likely to be a permanent feature of the various labor markets in which we operates. We face labor market pressures on computing engineering skills and similar pressures on retaining and recruiting high caliber geoscience staff. The present moderation in the labor market (due to the recent decline of the high-tech sector, and the layoffs by the major oil companies) is expected to be temporary. Those labor markets that have, up to now, not been impacted by the upward pressures on salaries and benefit packages will begin to feel this impact as more companies establish globally distributed research and development centers, and the demand for high caliber geoscientists increases with the anticipated increase in oil exploration and production expenditures. We believe that high levels of reinvestment in new product development is essential to maintain our competitive position, and to continue to deliver innovative technologically advanced products. The expected demands of the industry for an expanded set of solutions also sets the level of our product development expenditures. Looking forward, we expect to continue the levels of research and development expenditures at similar proportions to our total revenues. Major efforts have been expended to provide truly integrated software across all our applications, serviced from a common data base, transparent to each application, without the need for specific downloads. This effort is also a necessary component in our product 32 34 acquisition strategy, and ensures that each newly acquired product will work with our existing offerings and on our data base. Because of the open-architecture expected by the industry we have expended efforts that permit our software to work on our competitors' data bases, and to interact with our competitors' software. We also provide our customers with tool-kits that permit the incorporation of their proprietary workflows and algorithms into our software. SALES AND MARKETING, GENERAL AND ADMINISTRATIVE EXPENSES
(US $ millions) 1998 1999 2000 ---- ---- ---- SALES AND MARKETING, GENERAL AND $15.8 $20.6 $23.5 ADMINISTRATIVE as % of Total Revenue 35% 38% 37% ---- ---- ---- year-over-year increase 30% 14%
Sales and marketing, general and administrative expenses consist primarily of salaries, commissions on sales, advertising, trade shows, outside professional fees, cost of facilities and other related expenses. In 1999, selling, general and administrative expenses also included a one-time bad debt write-off totaling $ 1.2 million which was associated with long overdue receivables. On a year-over-year basis these expenses increased by 14% in 2000. In 1999, we adopted an expansion policy to ensure that the infrastructure would be in place for the then expected early-2000 upturn in the market. Consequently infrastructure was not further expanded in 2000, except in fast growing markets in Russia and Latin America. The sales and marketing staff acquired as part of the acquisition of the Flagship business in October 2000, enabled us to establish the infrastructure to serve customers in Southern Europe and Africa from Paris and Pau. DEPRECIATION AND AMORTIZATION
(US $ millions) 1998 1999 2000 ---- ---- ---- DEPRECIATION $ 2.3 $3.9 $4.7 as % Total Revenue 5% 7% 7% ---- ---- ---- year-over-year increase 68% 23% AMORTIZATION $ 2.3 $3.1 $3.4 as % Total Revenue 5% 6% 5% ---- ---- ---- year-over-year 30% 10% increase/(decrease) TOTAL DEPRECIATION AND $ 4.6 $7.0 $8.1 AMORTIZATION as % Total Revenue 10% 13% 13% ---- ---- ---- year-over-year increase 49% 17%
33 35 The depreciation expense consists of the depreciation of capital equipment. See note 2e of our consolidated financial statements for details of our accounting policy on depreciation. The amortization expense consists of amortization of acquired developed technology and capitalized research and development costs, and amortization of goodwill. See note 2f of our consolidated financial statements for details of our accounting policy on amortization of acquired developed technology and goodwill, and note 2h for details of our accounting policy on amortization of capitalized research and development costs. The main reason for the year over year increase in depreciation in 1999 was the investment in expanding computing capacity and equipment for the services department which totaled $3.4 million in 1999. The increase in amortization in 1999 was primarily due to the addition of goodwill and acquired developed technology attributable to the PTM acquisition, offset by the effect of the impairment loss in relation to developed technology following the PTM acquisition. Despite the acquisition of the Flagship business, amortization did not rise significantly in 2000, as the acquisition only took place in October resulting in only one quarter's impact on the amortization charge. In the future, if we are successful in acquiring complementary businesses, accounted for using the purchase method of accounting, further increases in the amortization expense can be expected due to the addition of acquired technology and goodwill attributable to such acquisitions. NON RECURRING EXPENSES In 1999, we recorded non recurring expenses totaling $2.7 million which included $0.8 million related to lease termination costs from the elimination of duplicate facilities, $1.6 million related to impairment costs of developed technology, developed or acquired prior to the PTM acquisition, and $0.3 million associated with personnel reductions. FINANCIAL EXPENSES, NET
(US $ millions) 1998 1999 2000 - --------------- ---- ---- ---- FINANCIAL EXPENSES, NET $ 0.66 $ 0.48 $ 0.55 as % of Total Revenue 1.5% 0.9% 0.9% ---- ---- ---- year-over-year increase -27% 14%
34 36 The interest expense resulted from interest expenses from the use of bank lines of credit and capital lease obligations and interest income resulted from interest earned on our cash and cash balances. OPERATING INCOME, AND NET INCOME
(US $ millions) 1998 1999 2000 --------------- ---- ---- ---- OPERATING INCOME/(LOSS) $5.6 ($3.3) $3.3 As % Total Revenue 12% (6%) 5% ------------------ ----- ------ ----- NET INCOME/(LOSS) $4.6 ($3.8) $2.4 As % Total Revenue 10% (7%) 4% ------------------ ----- ------ -----
The operating loss in 1999 before non-recurring items of $2.7 million, was $0.6 million. Operating income in 2000, compared to 1999 (before non-recurring items), reflects our decision to hold the infrastructure stable in 2000 until the recovery in expenditure by oil and gas companies. Net income recovered significantly in 2000 over 1999. Our cost structure has a significant fixed cost component in the short term so that any improvements in revenues have a disproportionately positive impact on the net income. B. LIQUIDITY, CAPITAL RESOURCES AND FINANCING
(US $ millions) 1998 1999 2000 --------------- ---- ---- ---- CASH PROVIDED FROM/(USED IN) OPERATIONS ($1.8) ($0.9) $ 12.6 as % Total Revenue (4%) (2%) 20% ------------------ ------ ------ ------ CASH (USED IN) INVESTMENTS ($4.5) ($15.4) ($9.4) CASH FROM FINANCING $ 1.7 $ 18.9 ($0.1) ------------------ ------ ------ ------ CASH YEAR END $ 3.5 $ 5.5 $ 8.6 year-over-year increase 58% 58% ------------------ ------ ------ ------
We finance our operations and capital requirements mainly through equity funding, bridge funding and bank credit facilities. At December 31, 2000, cash and cash equivalents were $ 8.6 million, compared to $ 5.5 million as of December 31, 1999. At December 31, 2000, short term bank debt, including current maturities of long term loans, was $7.6 million and long term bank loans was $ 1.3 million, compared to $ 4.6 million and $ 3.9 million, respectively, as of December 31, 1999. As of December 31, 2000, our aggregate obligations under equipment leases were $1.3 million, compared to $1.9 million as of December 31, 1999. 35 37 As of March 31, 2001, cash and cash equivalents were $8.4 million, short term bank debt, including current maturities of long term loans, was $ 6.6 million, long term bank loans were $2.5 million and total lease obligations were $1.1 million. In 2000, we increased our bank credit facilities for short-term and long-term borrowings from $18 million to a total of $20 million, of which an aggregate amount of $ 8.9 million was utilized as of December 31, 2000 and $9.1 million as of March 31, 2001. The current interest rate on these borrowings is the London Inter Bank Offer Rate ("LIBOR") for three months, plus 1.0%. As security for the bank credit facilities, we have registered a floating charge on all of our assets in favor of the banks. In 2000, we increased short-term bank debt by $2.5 million and repaid long term bank debt totaling $2.7 million. Our positive cash flow from operations resulted primarily from increased revenues and improved customer collections. Our operating activities provided cash in the amount of $12.6 million in 2000. Our operating activities used cash in the amount of $1.8 million in 1998 and $0.9 million in 1999. As of December 31, 2000, we had working capital of $10.9 million (of which $8.7 was in cash and cash equivalents), compared to working capital of $15.3 million (of which $ 5.5 million was in cash and cash equivalents) as of December 31, 1999. This decrease in working capital is attributable to an increase in current liabilities, primarily short term bank debt and trade payables. We used cash in investing activities of $4.5 million in 1998, $15.4 million in 1999 and $9.4 million in 2000. Our principal investing activities were the purchase of computer hardware, and the acquisitions made by us in 1999 and 2000 including the PTM and Flagship acquisitions. In 1998, our financing activities provided approximately $1.7 million (net), primarily attributable to our initial public offering, which raised $21.2 million. The proceeds of our public offering were primarily used to repay bridge loans and notes in an aggregate amount of $20 million incurred in connection with our acquisition of CogniSeis in October 1997. In 1999, our financing activities provided approximately $13.0 million, primarily attributable to the sale and issuance of our ordinary shares and warrants to acquire ordinary shares of Paradigm in three private placements. As of May 31, 2001, we had a capital expenditure commitment for computer hardware of $900,000. Our anticipated capital expenditure budget for 2001 for ongoing equipment replacement and intrinsic growth needs is estimated at approximately $7.0 million, of which $2.0 million had been spent as of March 31, 2001. Where appropriate, we have availed ourselves of equipment leasing facilities for the acquisition of fixed assets and may continue to do so in the future. Our ability to increase our operating income and cash flow is dependent upon continued capital spending and investment. Looking forward, we believe that our cash flow from operations and our unutilized bank credit facilities are adequate for any immediate financing requirements arising from normal operations, working capital and capital expenditures. However, a more ambitious expansion program and acquisitions may have to be financed from external sources either as additional leverage on the balance sheet or through a range of equity related financing instruments or otherwise. 36 38 ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES A. DIRECTORS AND SENIOR MANAGEMENT The following table sets forth certain information regarding our executive officers and directors as of May 31, 2001. NAME: AGE: POSITION: ----- ---- --------- Eldad Weiss (2) 45 Chairman of the Board and Chief Executive Officer Yehezkel Marueli 47 President and Chief Operating Officer Brian W. Berman 55 Chief Financial Officer Elie Barr (1) 54 Director Jacob Dunietz 45 Director Michael Geiger (2) 63 Director Thierry LeRoux 47 Director Jay Seid (1) 40 Director Gen. (Res.) Zvi Zamir (1) 76 External Director Mary Safrai (1) (2) 57 External Director Jonathan Keller 49 Corporate Secretary (1) Member of the Audit Committee (2) Member of the Compensation Committee The background of each of our directors and executive officers is as follows: ELDAD WEISS has served as Chief Executive Officer and a Director of the Company since the commencement of its operations in 1988 and as Chairman since July 1999. From July 1992 to July 1993, Mr. Weiss served as the Vice President of Grant-Tensor Geophysical Corporation, a Houston based geophysical services Company, where he was Senior Vice President in charge of the computer aided exploration division. From June 1985 until February 1988, Mr. Weiss was employed in the research and development department of Scitex Corporation Ltd. ("Scitex"). Mr. Weiss holds a Bachelors and a Masters degree in Electrical Engineering from Tel Aviv University. 37 39 YEHEZKEL MARUELI has served as the Company's Chief Operating Officer since April 1997 and as President since January 2000. From November 1995 until December 1996, Mr. Marueli served as the Vice President of Business Operations at Scitex Europe S.A., and from January 1991 until November 1995, he served as Scitex's Vice President of Corporate Logistics. Mr. Marueli holds a Bachelors degree in Economics, with honors, from Tel Aviv University. BRIAN W. BERMAN has served as the Chief Financial Officer of the Company since April 1998. From February 1993 until April 1998, Mr. Berman served in various capacities at the World Bank, including a position as the head of a strategy and advisory group on agribusiness investments. Prior to that time, Mr. Berman served as a consultant for Israeli high technology start-up companies, including the Company. Mr. Berman holds a Bachelors degree in Chemistry and Physics and a Masters degree in Chemistry from the University of Natal in South Africa. In addition, Mr. Berman holds an M.B.A. from the Columbia University Graduate School of Business in New York. ELIE BARR has served as a Director since June 1996. Mr. Barr has been a Managing Partner of Mofet Israel Technology Fund since 1996. Prior to that, Mr. Barr was a consultant to high-tech companies and certain governmental entities. From 1992 to 1996, Mr. Barr was an Executive Vice President of Teledata Communications Ltd., a telecommunications Company, whose securities were publicly traded on the Nasdaq National Market and which was subsequently acquired by ADC.. Mr. Barr has a Bachelors degree in Economics and Political Sciences from Tel Aviv University and a Bachelors degree in Philosophy from Bar-Ilan University. JACOB DUNIETZ has served as a Director since July 1993 and served as Chairman of the Board of Directors of the Company from July 1993 until July 1999. Mr. Dunietz is the President of Ai Research and Development in Artificial Intelligence Ltd., an international privately owned company. Mr. Dunietz is also Chairman of the Board of Directors of Dunietz Brothers Ltd., a construction and real estate company, whose securities are publicly traded on the Tel Aviv Stock Exchange, and he also serves as a member of the Board of Directors of all of its subsidiaries. Until December 2000, Mr. Dunietz was Chief Executive Officer and a director of Magic Software Enterprises Ltd., an Israeli software company whose securities are publicly-traded on the Nasdaq National Market, and a member of the Board of Directors of BVR Technologies Ltd., a holding company, whose securities are publicly traded on the Nasdaq National Market. Until December 1999, Mr. Dunietz was Chief Executive Officer and a director of Mashov Computers Ltd., a publicly-traded holding company, which is quoted on the Tel Aviv Stock Exchange. Mr. Dunietz holds a Bachelors degree in Computer Science from The Technion - Israel Institute of Technology. MICHAEL GEIGER has served as a Director since May 1999. Mr. Geiger has been a senior international consultant to the Shamrock International Group since 1987. Mr. Geiger served as a consultant to Occidental Petroleum Corporation for their energy and chemical industry activities in Israel. Mr. Geiger holds a Bachelors degree in Economics from Tel-Aviv University, of which he is a Governor, and a Masters degree in Economics from the University of California in Los Angeles. 38 40 THIERRY LE ROUX has served as a Director since November 2000. Mr. Le Roux has served as Senior Executive Vice-President of Compagnie Generale de Geophysique ("CGG"), a French company, whose securities are publicly quoted on the New York Stock Exchange and the Paris Stock Exchange, since October 1998. From January 1995 until September 1998, Mr. Le Roux served as Executive Vice-President of CGG. Mr. Le Roux has served as Chairman and Chief Executive Officer of Sercel S.A., a French company which is a subsidiary of CGG since June 1995. Mr. Le Roux is a director of Consotium Francais de Localisation S.A., and Interactive Network Technologies Inc. From 1996 until 1998, Mr. Le Roux was a director of Dassault Sercel Navigation Positionnement S.A. From 1995 until 1999, Mr. Le Roux was a director of Mobiloc S.A.S. Mr. Le Roux holds an engineering degree from Ecole Nationale des Ponts et Chaussees, Paris and a business degree from Centre de Perfectionnement aux Affaires (CPA), Paris. JAY SEID has served as a Director since April 1999. Mr. Seid is a Managing Director of Bachow & Associates Inc. Prior to joining Bachow & Associates Inc. in December 1992, Mr. Seid was President of Judicate, Inc., a publicly traded nationwide provider of alternative dispute resolution (mediation and arbitration) services. Previously, he was an attorney specializing in mergers and acquisitions at Wolf, Block, Schorr and Solis-Cohen in Philadelphia. Mr. Seid is a member of the Board of Directors of OutSource International. Inc., Vista Information Solutions, Inc. and Berger Holdings, Ltd. Mr. Seid also serves on the Boards of Directors of several privately-held companies. Mr. Seid holds a Bachelors degree, Summa Cum Laude, from Rutgers University and a J.D., with honors, from New York University School of Law. GENERAL (RES.) ZVI ZAMIR has served as an External Director since November 2000. Gen.(Res.) Zamir is a director of The Israel Corporation, Pardess Industries and Magor Holdings. Gen.(Res.) Zamir is also a director of Oil Refineries Ltd. a company owned jointly by the government of Israel and The Israel Corporation and of several private companies and public bodies. Gen.(Res.) Zamir holds a Bachelors degree in Middle East History, Arabic and Geography from the Hebrew University, Jerusalem. MARY SAFRAI has served as an External Director since November 2000. From 1989 until 2000, Ms. Safrai was an advisor in corporate finance and an analyst of oil exploration and production companies and oil service companies at Carl H. Phorzheimer & Co. in New York. Ms. Safrai is a Chartered Financial Analyst, a member, and former officer of the National Association of Petroleum Analysts, a member of the Oil Analysts of New York and of the New York Society of Security Analysts where she chaired the energy committee. Ms. Safrai holds a Master of Business Administration in finance and economics from New York University, a Masters degree in English Literature from Boston College, and a Bachelors degree from Syracuse University. JONATHAN KELLER has served as Corporate Secretary since January 1994. From January 1994 until August 1997, Mr. Keller served as the Company's Financial Controller. Prior to January 1994, Mr. Keller was a self employed Certified Public Accountant and in this capacity provided financial services to the Company. Mr. Keller is a qualified Israeli Certified Public Accountant and is a Fellow of the Institute of Chartered Accountants in England and Wales. Mr. Keller holds an accounting degree from London Guildhall University. 39 41 AGREEMENTS FOR NOMINATION OF DIRECTORS Pursuant to the agreement between the Company and Shamrock Holdings Inc. ("Shamrock") dated March 12, 1999, the Company undertook that as long as Shamrock holds more than three and a half percent (3.5%) of the issued and outstanding shares of the Company, the Company will recommend to the shareholders of the Company prior to any general meeting of shareholders of the Company, at which directors may be proposed to be elected, to elect a representative of Shamrock to the Board of Directors of the Company and will take all lawful actions to solicit such election. Pursuant to the agreement between the Company and Jerusalem Venture Partners dated March 12, 1999 ("JVP"), the Company undertook to make its best efforts to ensure that as long as JVP holds more than three and a half percent (3.5%) of the issued and outstanding shares of the Company, at least one of two members of the Board of Directors of the Company who will be individuals who have expertise in the field of operation of the Company, and who are not employees of the Company, and who have no material economic connection to any shareholder of the Company, will be nominated for election by agreement between the Company and JVP. As long as JVP holds more than three and a half percent (3.5%) of the issued and outstanding shares of the Company, the Company will recommend to the shareholders of the Company at the annual general meeting of shareholders of the Company to elect Mr. Erel Margalit to the Board of Directors of the Company. In December 2000, Mr. Margalit, who served as a director since May 1995, resigned. Pursuant to our agreement with Compagnie Generale de Geophysigue ("CGG") dated October 4, 2000, as long as CGG and its Affiliates hold in the aggregate more than 5% of our Ordinary Shares, we undertook to recommend to our shareholders prior to any general meeting of shareholders, at which directors may be proposed to be elected, to elect a representative of CGG ( the "CGG Representative") to our board of directors, and will take all lawful actions to solicit such election provided that: (i) the CGG Representative is not directly involved in any business in competition with any of our material businesses (defined in the agreement as geoscience software and data processing and interpretation); and (ii) prior to the third anniversary date of the agreement, without the approval of our Board of Directors, CGG and its Affiliates have not acquired additional Ordinary Shares causing it to then hold in the aggregate a percentage of the outstanding Ordinary Shares in excess of 10.2% of our outstanding Ordinary Shares. ALTERNATE DIRECTORS Our Articles of Association provide, as permitted under Israeli law, that any director may, by written notice to us, appoint another person to serve as an alternate director (subject to the approval of a majority of the other directors in a written resolution or at the next meeting of the Board of Directors) and may cancel such appointment. The term of appointment of an alternate director may be for one meeting of the Board of Directors, or for a specified period, or until notice is given of the termination of the specified period, or of the appointment. A person may not act as an alternate director for more than one director and a director cannot act as an alternate director for another director. 40 42 No director currently intends to appoint any other person as an alternate director. EXTERNAL AND INDEPENDENT DIRECTORS The Israeli Companies Law requires Israeli companies with shares that have been offered to the public in or outside of Israel to appoint at least two external directors. No person may be appointed as an external director if the person or the person's relative, partner, employer or any entity under the person's control as of the date of appointment as an external director, has or had, within the two years preceding the date, any affiliation with the company, any entity controlling the company, or any entity controlled by or under common control with the company. The term affiliation includes: - an employment relationship; - a business or professional relationship maintained on a regular basis; - control; and - service as an officer holder. No person may serve as an external director if the person's position or other business create, or may create, a conflict of interest with the person's responsibilities as an external director or may otherwise interfere with the person's ability to serve as an external director. If, at the time external directors are to be appointed, all current members of the Board of Directors are of the same gender, then at least one external director shall be of the other gender. External directors are appointed by a majority vote at a shareholders' meeting, provided that either: - the majority of shares voted at the meeting, including at least one-third of the shares held by non-controlling shareholders, voted at the meeting, vote in favor of the appointment; or - the total number of shares held by non-controlling shareholders voting against the election of the director at the meeting does not exceed one percent of the aggregate voting rights in the company. The initial term of an external director is three years and may be extended for an additional three years. External directors may be removed only by the same percentage of shareholders as is required for their election, or by a court, and then only if the external director ceases to meet the statutory qualifications for his or her appointment or if he or she violates his or her fiduciary duty 41 43 to the company. Each committee of a company's Board of Directors must include at least one external director, with the exception of the audit committee which must include all of the company's external directors. An external director is entitled to compensation as provided in the regulations adopted under the Israeli Companies Law and is otherwise prohibited from receiving any other compensation, directly or indirectly, in connection with service provided as an external director. Our shareholders have elected Gen.(Res) Zvi Zamir and Ms. Mary Safrai as external directors at our annual general meeting in November 2000. In addition, the Nasdaq National Market requires us to have at least two independent directors on our Board of Directors and to establish an audit committee, at least a majority of whose members are independent directors. The composition of our Board of Directors and our audit committee is in compliance with the requirements of the Nasdaq National Market. B. COMPENSATION OF DIRECTORS AND OFFICERS The following table sets forth all compensation we paid with respect to all of our directors and executive officers as a group for the year ended December 31, 2000.
Salaries, fees, Pension, retirement commissions and bonuses and similar benefits ----------------------- -------------------- All directors and executive officers as a group consisting of 11 persons .. $ 662,000 $ 95,000
During the fiscal year ended December 31, 2000, the aggregate remuneration paid to all persons who served in the capacity of executive officer or director in 2000 was approximately $ 757,000. This does not include amounts expended by us for automobiles made available to our officers, expenses, including business, travel, professional and business association dues and expenses, reimbursed to officers and other fringe benefits commonly reimbursed or paid by companies in Israel. As of May 31, 2001, we had granted options under various 1994 Stock Option Plans to certain officers to purchase an aggregate of 139,439 ordinary shares at exercise prices ranging from $.59 to $7.00 per share which are fully vested, and under various 1997 Stock Option Plans to purchase an aggregate of 412,934 ordinary shares at exercise prices ranging from $5.00 to $7.00 per share of which 369,207 options are vested. In each case, the option exercise price was equal to the fair market value of the ordinary shares on the date of grant, as determined by the Board of Directors. 42 44 C. BOARD PRACTICES APPROVAL OF RELATED PARTY TRANSACTIONS UNDER ISRAELI LAW FIDUCIARY DUTIES OF OFFICE HOLDERS Israeli Companies Law codifies the fiduciary duties that "office holders", including directors and executive officers, owe to a company. An "office holder" as defined in the Israeli Companies Law is a director, general manager, chief business manager, deputy general manager, vice general manager, chief business manager, executive vice president, vice president, other manager directly subordinate to the managing director or any other person assuming the responsibilities of any of the foregoing positions without regard to such person's title. An office holder's fiduciary duties consist of a duty of care and a duty of loyalty. The duty of care requires an office holder to act at a level of care which a reasonable office holder in the same position would employ under the same circumstances. This includes the duty to utilize reasonable means to obtain (i) information regarding the appropriateness of a given action brought for his approval or performed by him by virtue of his position and (ii) all other information of importance pertaining to the foregoing actions. The duty of loyalty includes avoiding any conflict of interest between the office holder's position in the company and his personal affairs, avoiding any competition with the company, avoiding exploiting any business opportunity of the company in order to receive personal gain for the office holder or others, and disclosing to the company any information or documents relating to the company's affairs which the office holder has received due to his position as an office holder. Each person listed as a director or executive officer in the table under " -- Beneficial Ownership of Executive Officers and Directors " below is an office holder. Under Israeli Companies Law, all arrangements as to compensation of office holders who are not directors require approval of our Board of Directors, and the compensation of office holders who are directors must be approved by our Audit Committee, Board of Directors and shareholders. DISCLOSURE OF PERSONAL INTEREST OF AN OFFICE HOLDER The Israeli Companies Law requires that an office holder promptly disclose any personal interest that he or she may have and all related material information known to him or her, in connection with any existing or proposed transaction by us. In addition, if the transaction is an extraordinary transaction, that is, a transaction: - other than in the ordinary course of business, - other than on market terms, or 43 45 - likely to have a material impact on the company's profitability, assets or liabilities. The office holder must also disclose any personal interest held by: - the office holder's spouse, siblings, parents, grandparents, descendants, spouse's descendants, - the spouses of any of the foregoing, or - any corporation in which the office holder is a 5% or greater shareholder, director or general manager or in which he or she has the right to appoint at least one director or the general manager. - Some transactions, actions and arrangements involving an office holder (or a third party in which an office holder has an interest) must be approved by the board of directors or as otherwise provided for in a company's articles of association, as not being adverse to the company's interest. In some cases, such a transaction must be approved by the audit committee and by the board of directors itself (with further shareholder approval required in the case of extraordinary transactions). An office holder who has a personal interest in a matter, which is considered at a meeting of the board of directors or the audit committee, may not be present during the board of directors or audit committee discussions and may not vote on this matter. DISCLOSURE OF PERSONAL INTERESTS OF A CONTROLLING SHAREHOLDER The Israeli Companies Law also provides that some transactions between a public company and a controlling shareholder, or transactions in which a controlling shareholder of the company has a personal interest but which are between a public company and another entity, require the approval of the board of directors and of the shareholders. Moreover, an extraordinary transaction with a controlling shareholder or the terms of compensation of a controlling shareholder must be approved by the audit committee, the board of directors and shareholders. The shareholder approval for an extraordinary transaction must include at least one-third of the shareholders who have no personal interest in the transaction and are present at the meeting. The transaction can be approved by shareholders without this one-third approval, if the total shareholdings of those shareholders who have no personal interest and voted against the transaction do not represent more than one percent of the voting rights in the company. In addition, a private placement of securities that will increase the relative holdings of a shareholder that holds 5% or more of the company's outstanding share capital or that will cause any person to become, as a result of the issuance, a holder of more than five percent of the company's outstanding share capital, requires approval by the board of directors and the shareholders of the company. 44 46 The Israeli Companies Law provides that an acquisition of shares in a public company must be made by means of a tender offer if as a result of the acquisition the purchaser would become a 25% shareholder of the company. This rule does not apply if there is already another 25% shareholder of the company. Similarly, the Israeli Companies Law provides that an acquisition of shares in a public company must be made by means of a tender offer if as a result of the acquisition the purchaser would become a 45% shareholder of the company, unless there is a 50% shareholder of the company. Regulations under the Israeli Companies Law provide that the Israeli Companies Law's tender offer rules do not apply to a company whose shares are publicly traded outside of Israel, if pursuant to the applicable foreign securities laws and stock exchange rules there is a restriction on the acquisition of any level of control of the company, or if the acquisition of any level of control of the company requires the purchaser to make a tender offer to the public shareholders. EXCULPATION OF OFFICE HOLDERS The Israeli Companies Law provides that an Israeli company cannot exculpate an office holder from liability with respect to a breach of his duty of loyalty, but may exculpate in advance an office holder from his liability to the company, in whole or in part, with respect to a breach of his duty of care. Our Articles of Association provide that, subject to any restrictions imposed by corporate law, we may enter into a contract for the insurance of the liability of any of our office holders with respect to: - a breach of his duty of care to us or to another person; - a breach of his duty of loyalty to us, provided that the office holder acted in good faith and had reasonable cause to assume that his act would not prejudice our interests; or - a financial liability imposed upon him in favor of another person in respect of an act performed by him in his capacity as an office holder. INDEMNIFICATION OF OFFICE HOLDERS We may, under our Articles of Association, indemnify an office holder against: - a financial liability imposed on him in favor of another person by any judgment, including a settlement or an arbitrator's award approved by a court in respect of an act performed in his capacity as an office holder; and - reasonable litigation expenses, including attorneys' fees, expended by such office holder or charged to him by a court, in proceedings we institute against him or instituted on our behalf or by another person, or in a criminal charge from which he was acquitted, all in respect of an act performed in his capacity as an office holder. 45 47 LIMITATIONS ON EXCULPATION AND INDEMNIFICATION These provisions are specifically limited in their scope by the Israeli Companies Law, which provides that a company may not indemnify an office holder, nor enter into an insurance contract which would provide coverage for any monetary liability incurred as a result of any of the following: - a breach by the office holder of his duty of loyalty unless the office holder acted in good faith and had a reasonable basis to believe that the act would not prejudice the company; - a breach by the office holder of his duty of care if such breach was done intentionally or in disregard of the circumstances of the breach or its consequences; - any act or omission done with the intent to derive an illegal personal benefit; or - any fine levied against the office holder as a result of a criminal offense. Under the Israeli Companies Law, our shareholders may amend our Articles of Association to include either of the following provisions: - A provision authorizing us to grant in advance an undertaking to indemnify an office holder, provided that the undertaking is limited to types of events which the board of directors deems to be anticipated and limited to an amount determined by the board of directors to be reasonable under the circumstances; or - A provision authorizing us to retroactively indemnify an office holder. In addition, pursuant to the Israeli Companies Law, indemnification of, and procurement of insurance coverage for, our office holders must be approved by our Audit Committee and our Board of Directors and, in specified circumstances, by our shareholders. We have indemnified our office holders to the fullest extent permitted under Israeli Law. In addition, we currently maintain directors and officers liability insurance for the benefit of our office holders. ELECTION OF DIRECTORS Pursuant to our Articles of Association, our Board of Directors shall consist of a minimum of two and a maximum of eleven directors and all of our directors (except the external directors as detailed above) are elected at our annual general meeting of shareholders by a vote of the holders of a majority of the voting power represented and voting at such meeting. All the members of our Board of Directors (except the external directors as detailed above) may be re-elected upon completion of their term of office. Our Articles of Association provide that, subject to the limitation on the number of directors, the Board of Directors may appoint another person as a director, whether to fill a vacancy or to add to their number; any directors so appointed shall hold office until the next annual general meeting and may be re-elected. All eight directors currently in office were elected by our shareholders at our annual general meeting of shareholders in November 2000. 46 48 EMPLOYMENT AGREEMENTS We have not entered into employment or service agreements with directors other than the Chairman and Chief Executive Officer, Mr. Eldad Weiss, details of which are provided below. We have entered into an employment agreement with Mr. Eldad Weiss for an initial term of three years commencing in March 1997 which was automatically renewed after the expiration of the initial term and remains in force unless and until either party terminates the agreement, by giving the other party twelve months prior written notice, for any reason and without explanation. Pursuant to his employment agreement, Mr. Weiss receives an annual base salary and may, at the discretion of the Board of Directors, receive a bonus based on achieving targets set by the Board of Directors. Furthermore, Mr. Weiss has received options to purchase 353,440 Ordinary Shares of the Company. Mr. Weiss's employment agreement also contains confidentiality and non-competition provisions. We entered into an employment agreement with Mr. Brian Berman in April 1998 which is terminable by either party upon 180 days prior written notice. Pursuant to his employment agreement, Mr. Berman receives an annual base salary and may, at the discretion of the Board of Directors, receive a bonus based on achieving targets set by the Board of Directors. Furthermore, Mr. Berman has received options to purchase 50,000 Ordinary Shares of the Company. Mr. Berman's employment agreement provides for a one-time reimbursement of certain relocation costs and requires compliance with confidentiality and non-competition provisions. The Company entered into an employment agreement with Mr. Hezi Marueli, which is terminable by either party upon 180 days prior written notice. Pursuant to his employment agreement, Mr. Marueli receives an annual base salary and may, at the discretion of the Board of Directors, receive a bonus based on achieving targets set by the Board of Directors. Furthermore, Mr. Marueli has received options to purchase 110,000 Ordinary Shares of the Company. Mr. Marueli's employment agreement requires compliance with confidentiality and non-competition provisions. AUDIT COMMITTEE The Israeli Companies Law provides that public companies must appoint an audit committee. The responsibilities of the audit committee include identifying irregularities in the management of the Company's business and approving related-party transactions as required by law. Under the Israeli Companies Law, an audit committee must consist of at least three members, and include all of the company's external directors. However, the chairman of the board of directors, any director employed by the company or providing services to the company on a regular basis, any controlling shareholder and any relative of a controlling shareholder may not be a member of the audit committee. An audit committee may not approve an action or a transaction with a controlling shareholder, or with an office holder, unless at the time of approval two external directors are serving as members of the audit committee and at least one of the external directors was present at the meeting in which an approval was granted. Our audit committee is currently composed of Messrs. Barr, Zamir, Safrai and Seid. It is currently contemplated that the audit committee meet at least four times each year. 47 49 INTERNAL AUDIT The Israeli Companies Law requires the board of directors of a public company to appoint an internal auditor nominated by the audit committee. A person who does not satisfy the Israeli Companies Law's independence requirements may not be appointed as an internal auditor. The role of the internal auditor is to examine, among other things, the compliance of the company's conduct with applicable law and orderly business practice. Our internal auditor complies with the requirements of the Israeli Companies Law. D. EMPLOYEES
MAY 31, 2001 DECEMBER 31, DECEMBER 31, 2000 1999 Research and Development 150 137 98 Sales and Marketing 106 105 78 Customer Support 94 76 78 Services 88 69 41 Management and Administration 75 67 66 ---------------------------------------------- TOTAL 513 454 361 ---------------------------------------------- North and South America 178 158 143 Europe, Africa, Middle East 247 219 160 Far East and China 88 77 58 ---------------------------------------------- TOTAL 513 454 361 ----------------------------------------------
We have to comply with various labor and immigration laws throughout the world, including laws and regulations in Argentina, Australia, Brazil, Canada, China, France, Indonesia, Israel, Russia, the United Kingdom, the United States and Venezuela. To date, compliance with such laws has not been a material burden for us. As the number of our employees increases over time, our compliance with such regulations could become more burdensome. Our principal operating subsidiaries are not party to any collective bargaining agreements. However, the Israeli parent company is subject to certain labor-related statutes and to certain provisions of collective bargaining agreements between the Histadrut (General Federation of Labor in Israel) and the Coordinating Bureau of Economic Organizations (including the Industrialists' Association), which are applicable to our Israeli employees by virtue of expansion orders of the Israeli Ministry of Labor and Welfare. A significant provision applicable to all employees in Israel under collective bargaining agreements and expansion orders is the automatic adjustment of wages in relation to increases in the consumer price index, or CPI. The 48 50 amount and frequency of these adjustments are modified from time to time. We consider our relationship with our employees to be good and have never experienced a labor dispute, strike or work stoppage. In addition, all employees in France are represented by unions. E. SHARE OWNERSHIP Beneficial Ownership of Executive Officers and Directors As of May 31, 2001, 14,891,902 Ordinary Shares of the Company were issued and outstanding. The following table sets forth, as of May 31, 2001, certain information with respect to the beneficial ownership of the Company's Ordinary Shares, as well as options and warrants exercisable within 60 days of May 31, 2001, by all directors and officers.
NAME BENEFICIAL OWNERSHIP OF PERCENTAGE OPTIONS TO PURCHASE SHARES ORDINARY SHARES Eldad Weiss 224,282 1.50% 347,214 (1) Yehezkel Marueli * 100,644 (2) Brian W. Berman * 33,531 (3) Elie Barr -- -- Jacob Dunietz * -- Michael Geiger -- -- Thierry LeRoux -- -- Jay Seid -- -- Gen. (Res.) Zvi Zamir -- -- Mary Safrai -- -- Jonathan Keller * 38,103 (4)
* Less than one percent (1) The exercise price of the options ranges between $4 and $7 per share and the options expire between 2004-2006. (2) The exercise price of the options ranges between $5 and $7 per share and the options expire between 2005-2006. (3) The exercise price of the options is $7 per share and the options expire between 2006-2008. (4) The exercise price of the options ranges between $0.59 and $7 per share and the options expire between 2004-2006. 49 51 STOCK OPTION PLANS THE 1994 STOCK OPTION PLANS In 1994, we approved a stock option plan for key employees (the "Key Employee Plan"), the May 1994 Stock Option Plan (the "May 1994 Plan") and the 1994 General Stock Option Plan (the "1994 General Plan") (the Key Employee Plan, the May 1994 Plan and the 1994 General Plan are collectively referred to as the "1994 Plans"). Under the Key Employee Plan, we granted options to six of our key employees to purchase a total of 63,336 Ordinary Shares, exercisable at $.59 per Ordinary Share, with the purchase price of the Ordinary Shares payable in full against issuance of the Ordinary Shares. The options issued pursuant to the Key Employee Plan are vested and became exercisable immediately upon the grant of such options. Under the May 1994 Plan and the 1994 General Plan, we have granted options to purchase a total of 226,184 and 60,176 Ordinary Shares, respectively. Both the May 1994 Plan and the 1994 General Plan are administered by either the Board of Directors or our Compensation Committee. The option exercise price under the May 1994 Plan for 114,678 Ordinary Shares is $2.50 per Ordinary Share, and for 111,506 Ordinary Shares is $4.00 per Ordinary Share. The option exercise price under the 1994 General Plan is $7.00 per Ordinary Share. Furthermore, under each of such Plans, the option exercise price is payable in cash, by check or by any other form of payment that is satisfactory to the Board of Directors or our Compensation Committee and the Company may provide loans to employees to assist them in purchasing shares upon exercise of the options. Under the May 1994 Plan, 200,696 options are vested and are exercisable immediately. Options granted under the 1994 General Plan, 51,352 are all vested and are exercisable immediately. Options granted under the May 1994 Plan and 1994 General Plan, if unexercised, expire ten years from the date of grant. Options granted under the 1994 Plans are not transferable by the option holder, other than by will or pursuant to the laws of descent and distribution. Under the 1994 Plans, the options expire immediately upon the termination of the option holder's employment, unless our Board of Directors or the Compensation Committee authorizes an extension of the exercise term beyond the employees termination date. In the event of a termination of employment without cause, any unexpired vested options may be exercised up to 90 days following the date of termination of employment, but only with respect to the number of shares purchasable at the time of the option holder's termination of employment. In the event of the termination of employment as a result of death or disability of the option holder, any unexpired vested options may be exercisable up to six months from the date of such termination but only with respect to the number of shares purchasable at the time of such termination. In the event of the option holder's retirement, any outstanding options shall, at the discretion of our Board of Directors or Compensation Committee, accelerate and become immediately exercisable as of the later of the date of retirement or one year following the date of the grant. 50 52 As of May 31, 2001, under the Key Employee Plan, the May 1994 Plan and the 1994 General Plan, options to purchase a total of 63,336, 200,696 and 51,352 Ordinary Shares, respectively, were outstanding. As of May 31, 2001, options granted under the 1994 Plans to certain officers of the Company to purchase an aggregate of 139,439 Ordinary Shares at exercise prices ranging from $.59 to $7.00 per share were outstanding. In each case, the option exercise price was equal to the fair market value of the Ordinary Shares on the date of grant, as determined by our Board of Directors. THE 1997 STOCK OPTION PLANS Under the 1997 Stock Option Plan for Qualifying Israel Employees, the 1997 Executive Stock Option Plan and the 1997 Stock Option Plan for U.S. Employees (collectively, the "1997 Plans"), we have reserved for issuance an aggregate of 1,950,000 Ordinary Shares. The 1997 Plans are administered by our Board of Directors or the Compensation Committee. The option exercise price per Ordinary Share will be determined by the Board of Directors or the Compensation Committee and will be set forth in an option agreement between us and each optionee, with the option price not being less that 100% of the fair market value of each option share at the date of the option grant, unless otherwise determined by the Board or the Compensation Committee. Fair market value is defined in the 1997 Plans as the mean between the highest and lowest quoted selling prices of our publicly traded shares listed on a stock exchange on such date. If no sales occur on the desired date, then fair market value will be determined by taking a weighted average of the mean between the highest and lowest quoted selling prices for a reasonable period both before and after the desired date. The option exercise price will be payable in cash, by check or by any other form of payment that is satisfactory to our Board of Directors or Compensation Committee. The 1997 Plans vest as to 25% of the options granted after a period of employment with us or our subsidiaries of 12 consecutive months from the date of the grant. The remaining 75% vest in 12 equal quarterly installments commencing from the end of the first 12 month vesting period. These options expire eight years from the date of grant. Options granted under the 1997 Plans are not transferable by the option holder, other than by will or pursuant to the laws of descent and distribution. Additionally, the options expire immediately upon the termination of the option holder's employment, unless our Board of Directors or Compensation Committee authorizes an extension of the exercise term beyond the employee termination date. In the event of termination of employment without cause, any unexpired vested options may be exercised up to 90 days following the date of termination of employment, but only with respect to the number of shares purchasable at the time of the option holder's termination of employment. In the event of the termination of employment as a result of death or disability of the option holder, any unexpired vested options may be exercised up to six months following the date of such termination, but only with respect to the number of shares purchasable at the time of such termination. In the event of the option holder's retirement, any outstanding options shall, at the discretion of our Board of Directors or Compensation Committee, accelerate and become immediately exercisable as of the later of the date of retirement or one year 51 53 following the date of the grant. The shares underlying any options which expire or are cancelled prior to exercise are subject to future options grants under the 1997 Plans. As of May 31, 2001, options to purchase a total of 1,529,772 Ordinary Shares under the 1997 Plans were outstanding. As of May 31, 2001, we had granted options under the 1997 Plans to certain officers to purchase an aggregate of 412,934 Ordinary Shares at exercise prices ranging from $5.00 to $7.00 per share; in each case, the option exercise price was equal to the fair market value of the Ordinary Shares on the date of grant, as determined by our Board of Directors. ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS A. MAJOR SHAREHOLDERS As a result of the concentration of ownership of our voting ordinary shares, some shareholders may be able to exercise control over matters requiring shareholder approval, including the election of directors and approval of significant corporate transactions. This control may have the effect of delaying or preventing a change in control of Paradigm. The following table sets forth certain information with respect to the beneficial ownership of our Ordinary Shares as of May 31, 2001 by each person who is known to own beneficially more than 5% of our outstanding Ordinary Shares.
Ordinary Shares Name And Address of Beneficially owned Beneficial Owners Number(1) Percent ================================================================================ Shamrock Holdings Inc. 1,649,943(2) 11.1% 4444 Lakeside Drive Burbank, California 91510-7774 U.S.A. Mashov Computers Ltd. 1,590,406 10.7% 3, Hagalim Boulevard, Herzlia, Israel 46766 Compagnie Generale de Geophysique 1,500,000(3) 10.1% Tour Montparnasse, 33 Ave du Maine, BP 191 75755 Paris, Cedex 15 France Bachow Investment Partners III L.P. 1,399,000 9.4% 3 Bala Plaza East, 5th floor Bala Cynwyd, PA 19004 U.S.A. Harbourvest Partners, 973,300 6.5% 1, Financial Center (flr. 44) Boston MA U. S. A. Jerusalem Venture Partners LP 793,293(4) 5.3% 1, Technology Park Bldg. Malha Jerusalem 91487 Israel
52 54 (1) Unless otherwise indicated, the entities identified in this table have sole voting and investment power with respect to all voting Ordinary Shares shown as beneficially owned by them, subject to community property laws, where applicable. (2) As part of a private placement in May 1999, Shamrock Holdings Inc. acquired 877,193 ordinary shares. Shamrock Holdings of California Inc., acquired a further 772,750 shares on the open market. Shamrock Holdings Inc. is a controlling person of Shamrock Holdings of California. Shamrock Holdings Inc. and Shamrock Holdings of California may be deemed to constitute a group within the meaning of Sec. 13(d)(3) of the Securities Exchange Act of 1934 as amended, with respect to the Ordinary Shares each owns. Accordingly, Shamrock Holdings Inc. may be deemed to beneficially own 1,649,943 Ordinary Shares. (3) In October 2000, Compagnie Generale de Geophysique received 1,500,000 Ordinary Shares as partial consideration for the acquisition of the Flagship business. (4) As part of a private placement in April 1999, Jerusalem Venture Partners LP acquired 877,193 Ordinary Shares. As of May 31, 2001, 14,891,902 of our Ordinary Shares were outstanding, all of which carry equal voting rights. At such date, there were 11 record holders of our Ordinary Shares in the United States who collectively held 73.5% of our outstanding Ordinary Shares. 53 55 SHAREHOLDERS AGREEMENTS For a description of the agreements between the Company and certain shareholders regarding the nomination of directors, see Item 6. "Directors and Senior Management - Agreements for Nomination of Directors". REGISTRATION RIGHTS Shareholders holding an aggregate of up to 7,412,370 Ordinary Shares of the Company and holders of warrants exercisable into an aggregate of up to 362,862 Ordinary Shares (collectively, "Registrable Securities"), have certain demand and incidental registration rights with respect to those shares. The holders of up to 5,757,688 of the Registrable Securities have the right to demand an aggregate of three registrations of the Company, and two demand registrations on Form F-3, but not more than one during any six month period. Two groups of shareholders holding an aggregate of up to 877,193 and up to 1,140,351 Ordinary Shares, respectively, each have one demand registration and one registration on Form F-3. Each demand and request on Form F-3 must relate to the registration of shares in a minimum amount of $3,000,000. Shareholders holding 1,500,000 Ordinary Shares and warrants to purchase 250,000 Ordinary Shares only have incidental registration rights. The demand registration rights are subject to an underwriter's right of cutback, provided that all shares of shareholders other than the Registrable Securities are first excluded from such registration. The Company has undertaken not to cause any other registration of securities for its own account to become effective within 120 days after the effective date of any such demand registration. Form F-3 registration may be delayed for up to 120 days (and in some cases 180 days) in the event that the Company furnishes the holders of Registrable Securities a certificate signed by the President or Chief Executive officer of the Company stating that, in the good faith judgment of the Board of Directors, it would be seriously detrimental to the Company or its shareholders for such F-3 registration to be effected at that time, provided that the Company may not utilize this right more than once in any 12 month period. The incidental registration rights are unlimited, subject to an underwriter's right of cutback, provided that all Registrable Securities must be included in the registration prior to any other shares of the Company (with the exception of shares issued by the Company to the public). All expenses incurred in connection with such registrations will be borne by the Company, except that participating shareholders will be obligated to pay their proportionate share of the fees, discounts or commissions payable to any underwriter. B. RELATED PARTY TRANSACTIONS LOANS TO OFFICERS We entered into two loan agreements with Mr. Yehezkel Marueli, President and Chief Operating Officer, one in March 1999 and the second in July 1999. Under the terms of the agreements, we loaned Mr. Marueli an aggregate amount of $110,000, linked to the Israeli Consumer Price Index, with interest at the rate of 2% per annum until May 31, 2000 and 4% per 54 56 annum from June 1, 2000. These loans were originally repayable on December 31, 2000, but repayment has been extended to December 31, 2001. C. INTERESTS OF EXPERTS AND COUNSEL Not applicable ITEM 8. FINANCIAL INFORMATION A. CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION See Item 18. LEGAL PROCEEDINGS Geophysical Micro Computer Application (International) Ltd. ("GMA") is appealing a final judgment entered by the trial court in the District Court of Dallas County, Texas in the matter of Paradigm Geophysical Ltd. vs. Geophysical Micro Computer Application (International) Ltd. On December 11, 1997, we filed suit for a declaratory judgment in the District Court of Dallas County, Texas to determine whether it has any obligation to GMA under a letter of intent (the "letter of intent"). Under the terms of the letter of intent, we and GMA contemplated a transaction in which GMA would purchase certain computer software programs and related products ("SeisX") from us, provided that we acquired the SeisX assets from a third party. On May 5, 1998, GMA filed a counterclaim for breach of contract, claiming that the letter of intent required us to sell SeisX to GMA. GMA sought compensatory, injunctive and declaratory relief. On September 11, 1998, the trial court granted summary judgment in our favor and declared that we had no obligation to sell the SeisX assets or related products to GMA, and that GMA takes nothing on its counterclaim. On December 7, 1998, GMA filed the above-referenced appeal. Oral arguments were presented before the Court of Appeals in April 2001 and the decision of the Court of Appeals is now awaited. We believe that the outcome of the above claim will not have an adverse effect on our business or on our consolidated financial statements. On December 10, 1999, our Canadian subsidiary ("Paradigm Canada") filed a claim for breach of contract, breach of obligation of confidence, breach of copyright and trademark infringement, and passing off against Zokero Incorporated, Edward Van Wieren and Shane Stogrin (the "defendants"). In addition, Paradigm Canada applied for and obtained an Anton Pillar Order on seizing certain property from the defendants and preserving it pending a trial of the action. An expert is reviewing the seized material. The defendants, Van Wieren and Stogrin, were former employees of Paradigm Canada. Paradigm Canada maintains that Van Wieren and Stogrin have, through their company, Zokero, utilized for their own commercial gain, confidential information and software and source code for software, all of which was developed by Paradigm Canada and is their property. Paradigm Canada is seeking unspecified damages and loss of profits, as well as injunctive relief and declaratory relief, with respect to the rights to the information and software in question. We believe that the outcome of the above claim will not have an adverse effect on our business or on our consolidated financial statements. 55 57 Other than as set forth above, we are not a party to any other material legal proceedings. DIVIDEND POLICY To date we have not declared or paid dividends to our shareholders . We retain our earnings for use in the expansion and operation of the business. The payment of any future dividends will be based on conditions then existing, including our earnings, financial condition and capital requirements as well as other conditions we deem relevant. The terms of our existing debt agreements and any additional debt that may be incurred by us may effectively limit our ability to pay dividends. ITEM 9. THE OFFER AND LISTING A. OFFER AND LISTING DETAILS Our Ordinary Shares have been quoted on the Nasdaq National Market under the symbol "PGEO" since June 15, 1998. Since February 19, 2001 we have also been quoted on the Tel Aviv Stock Exchange under the dual-listing legislation enabling companies that are quoted on U.S. markets to dual-list on the Tel Aviv Stock Exchange with no additional regulatory requirements. The following table sets forth, for the periods indicated, the high and low sale prices of our Ordinary Shares as reported on the Nasdaq National Market.
PERIOD HIGH LOW ------ ---- --- FOR 1998 $ 7.375 $ 4.190 FOR 1999 $ 7.250 $ 4.250 FOR 2000 $ 10.063 $ 4.250 1998 Second Quarter $ 7.375 $ 7.000 (commencing June 15, 1998) Third Quarter $ 7.125 $ 4.500 Fourth Quarter $ 5.875 $ 4.190 1999 First Quarter $ 5.125 $ 4.250 Second Quarter $ 7.250 $ 5.000 Third Quarter $ 6.750 $ 5.625 Fourth Quarter $ 5.875 $ 4.500
56 58
2000 First Quarter $ 10.063 $ 4.500 Second Quarter $ 7.813 $ 5.200 Third Quarter $ 6.875 $ 5.563 Fourth Quarter $ 7.000 $ 4.250 2001 January $ 5.063 $ 4.250 February $ 6.000 $ 5.125 March $ 6.000 $ 5.063 April $ 5.770 $ 4.969 May $ 6.680 $ 5.470
B. PLAN OF DISTRIBUTION Not applicable. C. MARKETS Not applicable. D. SELLING SHAREHOLDERS Not applicable. E. DILUTION Not applicable. F. EXPENSES OF THE ISSUE Not applicable. ITEM 10. ADDITIONAL INFORMATION A. SHARE CAPITAL Not applicable. B. MEMORANDUM AND ARTICLES OF ASSOCIATION 1. OBJECTS AND PURPOSES IN THE COMPANY'S ARTICLES OF ASSOCIATION We were first registered under Israeli law on July 27, 1987 as a private company, and on November 11, 1997, became a public company. Our registration number with the Israeli Registrar of Companies is 52-004351-4. Our objects and purposes are specified in Section 2 of our Memorandum of Association. 2. PROVISIONS REGARDING DIRECTORS 57 59 Pursuant to Article 54(b) of our Articles of Association, a transaction entered into by the Company in which a director of the Company has a personal interest, directly or indirectly, will be valid in respect of the Company and the given director only if approved by the Company's Board of Directors and, if such transactions are "irregular transactions" as defined in the Israeli Companies Law, only if approved in accordance with the requirements of the Israeli Companies Law. An "irregular transaction" pursuant to the Israeli Companies Law is defined as a transaction which is not in the ordinary course of business, a transaction which is not under ordinary market conditions or any transaction which might substantially affect the profitability of the Company, its assets and liabilities. The Israeli Companies Law provides that a director who has personal interest in a given transaction of the Company, brought to the approval of the Board of Directors, shall not be present and vote at that meeting unless a majority of the directors have a personal interest in the transaction. Article 55 of the Company's Articles of Association, provides that a director who has a personal interest in a matter which is brought for discussion before the Board of Directors may participate in said discussion, provided that he shall neither vote in with respect to nor attend discussions concerning the approval of the activities or the arrangements. If said director did vote or attend as aforesaid, the approval given to the aforesaid activity or arrangements shall be invalid. Pursuant to Article 72 of the Company's Articles of Association at any meeting of the Board of Directors at which a quorum is present, the board will have the authority to exercise all or part of the authorities, power of attorney and discretion invested at such time in the directors or regularly exercised by them. In respect of legal quorum at our Board meetings the Israeli Companies Law provides that, unless determined otherwise by the Company, a legal quorum at the Board meetings shall consist of the majority of the Board members. We have not decided otherwise and therefore, the legal quorum at our Board meeting will consist of the majority of the Board members. Any transaction concerning compensation to a director requires the approval of both the Board of Directors and the shareholders of the Company at the Company's General Meeting. The Board of Directors may from time to time, in its discretion, cause the Company to borrow or secure the payment of any sum or sums of money for the purpose of the Company, and may secure or provide for the repayment of such sum or sums in such manner, at such times and upon such terms and conditions in all respects as it sees fit and in particular, by the issuance of bonds, perpetual or redeemable debentures, debenture stock, or any mortgages, charges or other securities on the undertaking, or the whole or any part of the property of the Company, both present and future, including units uncalled or called but unpaid capital for the time being. There is no mandatory retirement age for the directors under our Articles of Association or the Israeli Companies Law. 58 60 There is no requirement concerning the number of shares one individual must hold in order to qualify him or her as a director under our Articles of Association or the Israeli Companies Law. 3. DIVIDENDS AND LIQUIDATION RIGHTS Subject to any preferential, deferred, qualified or other rights, privileges or conditions attached to any special class of shares with regard to dividends, the profits of the Company available for dividend and resolved to be distributed shall be applied in payment of dividends upon the shares of the Company in proportion to the amount paid up or credited as paid up per the nominal value thereon respectively. Unless not otherwise specified in the conditions of issuance of the shares, all dividends with respect to shares which were not fully paid up within a certain period, for which dividends were paid, shall be paid proportionally to the amounts paid or credited as paid on the nominal value of the shares during any portion of the above-mentioned period. The Board of Directors may declare a dividend to be paid to the shareholders according to their rights and interests in the profits, and may fix the record date for eligibility and the time for payment. The directors may from time to time pay to the shareholders on account of the next forthcoming dividend such interim dividends as, in their judgment, the position of the Company justifies. A transfer of shares shall not pass the right to any dividend declared thereon after such transfer and before the registration of the transfer. The Board of Directors may determine that, a dividend may be paid, wholly or partly, by the distribution of specific assets of the Company or by distribution of paid-up shares, debentures or debenture stock or any other securities of the Company or of any other companies or in any one or more of such ways in the manner and to the extent permitted by the Israeli Companies Law. 4. VOTES OF SHAREHOLDERS Except as otherwise provided in our Articles of Association, any resolution at a General Meeting shall be deemed adopted if approved by the holders of a majority of the voting rights in the Company represented at the meeting in person or by proxy and voting thereon. In the case of an equality of votes, either on a show of hands or a poll, the chairman of the meeting shall not be entitled to a further or casting vote. Subject to any rights or restrictions for the time being attached to any class or classes of shares, every shareholder shall have one vote for each share of which he is the holder. 59 61 Votes may be given either personally or by proxy. A proxy need not be a shareholder of the Company. 5. MODIFICATION OF CLASS RIGHTS If, at any time, the share capital is divided into different classes of shares, the rights attached to any class (unless otherwise provided by the terms of issuance of the shares of that class) may be varied with the consent in writing of the holders of all the issued shares of that class, or with the sanction of a majority vote at a meeting of the shareholders passed at a separate meeting of the holders of the shares of the class. The provisions of the Articles of Association relating to General Meetings shall apply, mutatis mutandis, to every such separate General Meeting. Any holder of shares of the class present in person or by proxy may demand a secret poll. Unless otherwise provided by the conditions of issuance, the enlargement of an existing class of shares, or the issuance of additional shares thereof, shall not be deemed to modify or abrogate the rights attached to the previously issued shares of such class or of any other class. 6. GENERAL MEETINGS General Meetings shall be held at least once in every calendar year at such time, not being more than fifteen months after the holding of the last preceding General Meeting, and at such time and place as may be determined by the Board of Directors. Such Annual General Meetings shall be called "Annual Meetings", and all other General Meetings of the shareholders shall be called "Special Meetings". Only shareholders of record as reflected on the Company's share register at the close of business on the date fixed by the board of directors as the record date determining the then shareholders who will be entitled to vote, shall be entitled to notice of, and to vote, in person or by proxy, at a General Meeting and any postponement or adjournment thereof. 7. PROCEEDINGS AT GENERAL MEETINGS No business shall be transacted at any General Meeting unless a quorum is present when the meeting proceeds to business. The quorum at any Meeting shall be two shareholders present in person or by proxy, holding or representing at least one-third of the total voting rights in the Company. A company being a shareholder shall be deemed to be personally present for the purpose of the Company's Articles of Association if represented by its representative duly authorized in accordance with Article 42 of the Company's Articles of Association. If, within half an hour from the time appointed for the holding of a General Meeting, a quorum is not present, the meeting shall stand adjourned to the same day in the next week at the same time and place, or any time and hour as the Board of Directors shall designate and state in a notice to the shareholders entitled to vote at the original meeting, and if, at such adjourned meeting, a quorum is not present within half an hour from the time appointed for holding the meeting any 60 62 two shareholders present in person or by proxy shall constitute a quorum. Notwithstanding the aforesaid, if a General Meeting was convened at the demand of shareholders as permitted by Section 63(b) of the Israeli Companies Law, then a quorum at such adjourned meeting shall be present only if one or more shareholders are present who held in the aggregate at least 5% of the issued share capital of the Company and at least 1% of the voting rights in the Company or one or more shareholders who hold in the aggregate at least 5% of the voting rights in the Company. 8. RESTRICTION ON NON-RESIDENTS The Memorandum and Articles of Association of the Company do not restrict in any way the ownership of ordinary shares by nonresidents, except with respect to subjects of countries which are in a state of war with Israel, and neither the Memorandum and Articles of Association nor Israeli law restricts the voting rights of nonresidents of the State of Israel. 9. RESTRICTIONS ON MERGERS; TAKEOVERS AND BUSINESS COMBINATIONS Pursuant to our Articles of Association, a merger requires approval by the Board and by our shareholders. In accordance with the provisions of the Israeli Companies Law and our Articles of Association, the Board may delay or impede a merger in the event that, in its opinion, there is a reasonable suspicion that as a result of the merger the merged Company will not be able to meet the company's obligations to its creditors. In addition, the Company's current Articles of Association provide that the Company may not engage in any business combination with an interested shareholder (in general, the Articles of Association defines an interested shareholder as any entity or person beneficially owning 15% or more of the outstanding voting shares of the Company and any entity or person affiliated with, controlling or controlled by such entity or person) for a period of three years following the date that such shareholder became an interested shareholder, unless: (a) prior to such date, the Board of Directors approved either the business combination or the transaction that resulted in the shareholder becoming an interested shareholder; or (b) upon consummation of the transaction that resulted in the shareholder becoming an interested shareholder, the interested shareholder owned at least 75% of the voting shares of the Company outstanding at the time the transaction commenced. A business combination includes: (a) any merger or consolidation involving the Company and the interested shareholder; (b) any sale, transfer, pledge or other disposition of 10% or more of the assets of the Company in a transaction involving the interested shareholder; (c) subject to certain exceptions, any transaction that results in the issuance or transfer by the Company of any shares of the Company to the interested shareholder; (d) subject to certain minor exceptions, any transaction involving the Company (or any direct or indirect majority owned subsidiary of the Company) which has the effect of increasing the proportionate shareholding or convertible securities of the Company (or any such subsidiary) which is owned by the interested shareholder; or 61 63 (e) the receipt by the interested shareholder of the benefit of any loans, advances, guarantees, pledges or other financial benefits provided by or through the Company. The Company has 2,000,000 Special Preferred Shares authorized ("Special Preferred Shares"). The Board of Directors has the authority to issue the Special Preferred Shares in one or more series and to fix the rights, preferences, privileges and restrictions of such shares, including dividend rights, dividend rates, conversion rights, voting rights, terms of redemption (including price), liquidation preferences and the number of shares constituting any series, without further vote or action by the shareholders. The issuance of Special Preferred Shares may have the effect of delaying, deferring or preventing a change in control of the Company without further action by the shareholders. For example, the Board of Directors could issue Special Preferred Shares with voting and conversion rights that may adversely affect the voting power of the holders of Ordinary Shares, including the loss of voting control to others. The Company has not issued, and currently has no plans to issue, any Special Preferred Shares. Although Israeli law does not prohibit the issuance of preferred shares with rights which were not approved by the shareholders at the time such preferred shares were authorized, this matter has not been determined by Israeli courts, and there is substantial doubt as to the validity of such an issuance. Consequently, to the extent that the rights, preferences and privileges attached to the Special Preferred Shares, if and when issued, derogate from the rights of the Ordinary Shares of the Company, there can be no assurance that, if such issuance was challenged in legal proceedings, the legality of such issuance would be upheld by an Israeli court. 10. APPROVAL OF SPECIAL TRANSACTIONS UNDER ISRAELI LAW Under the Israeli Companies Law, the approval of the Board of Directors is required only for arrangements with respect to compensation of a company's chief executive officer. Arrangements regarding the compensation of directors also require audit committee and shareholder approval. The Israeli Companies Law requires that an officer or a controlling shareholder in a public company, including an Israeli company that is publicly traded outside of Israel, promptly disclose to the audit committee, Board of Directors and, in certain circumstances, the shareholders, any personal interest that he may have and all related material information known to him, in connection with any existing or proposed transaction by the company (an officer and a controlling shareholder are under no such duty of disclosure when the personal interest stems only from the personal interest of a relative in a transaction that is not exceptional). In addition, if the transaction is an exceptional transaction, as defined in the Israeli Companies Law, the officer must also disclose any personal interest held by the officer's spouse, siblings, parents, grandparents, descendants, spouse's descendants and the spouse of any of the foregoing, or by a corporation in which the officer is a 5% or greater shareholder, director or general manager or in which he or she has the right to appoint at least one director or the general manager. The disclosure must be made without delay and not later than the Board of Directors meeting at which the transaction is first discussed. For these purposes, the definition of a controlling shareholder under the Israeli Companies Law includes a shareholder that holds 25% or more of the voting rights in a company, unless another shareholder holds more than 50% of the voting 62 64 rights (if two or more shareholders are interested parties in the same transaction their shareholdings shall be deemed cumulative). Once the officer or controlling shareholder complies with these disclosure requirements, the company may approve the transaction in accordance with the provisions of the Israeli Companies Law and its articles of association. Generally, the approval of the majority of the disinterested members of the audit committee and the Board of Directors is required. If audit committee approval is required for a transaction with an interested party, an officer or a controlling shareholder, such approval may not be given unless, at the time the approval was granted two members of the audit committee were external directors and at least one of them was present at the meeting at which the audit committee decided to grant the approval. Shareholder approval may also be required if the transaction is an exceptional transaction. An exceptional transaction is a transaction other than in the ordinary course of business, otherwise than on market terms or that is likely to have a material impact on the company's profitability, assets or liabilities. In such event, the principal terms of such transaction must be disclosed in a notice to the shareholders which will include all substantive documents relating to the transaction. If the transaction is with an officer or with a third party in which the officer or the controlling shareholder has a personal interest, the approval must confirm that the transaction is not adverse to the company's interest. Shareholders must also approve all compensation paid to directors in whatever capacity, a company's undertaking to indemnify a director or indemnification under a permit to indemnify and any transaction in which a majority of the board members have a personal interest. An officer with a personal interest in any matter may not be present at any audit committee or Board of Directors meeting where such matter is being approved, and may not vote thereon, unless the majority of the members of the audit committee or of the Board of Directors have a personal interest in such approval. Shareholders' approval for an exceptional transaction must include at least one third of the shareholders who have no personal interest in the transaction and are present at the meeting. However, the transaction can be approved by shareholders without this one-third approval if the total shareholdings of those who vote against the transaction do not represent more than one percent of the voting rights in the company, unless the Minister of Justice shall determine a different percentage. 11. ANTI-TAKEOVER PROVISIONS; MERGERS AND ACQUISITIONS UNDER ISRAELI LAW Pursuant to the Israeli Companies Law, if following any acquisition of shares of a public company or of a class of shares of a public company the acquiror will hold 90% or more of the company's shares or 90% of any class of the company's shares, respectively, then the acquiror must make a tender offer for all of the remaining shares or the particular class of shares of the company. In the event that 5% or more of the shareholders have not responded favorably to a tender offer, the offeror may not purchase more than 90% of that class of shares. This rule does not apply if the acquisition is made by way of a merger. Furthermore, the Israeli Companies Law provides that as long as a shareholder in a public company holds more than 90% of the company's shares or of a class of shares, such shareholder shall be precluded from purchasing any additional shares of that type. The Israeli Companies Law further provides that if following the tender offer such acquiring shareholder holds more than 95% of the outstanding shares of any class, the holders of all the 63 65 remaining shares will be obligated to transfer such shares to the acquiror at the tender offer price. This entails the possibility of additional delay and the imposition of further approval requirements at the court's discretion. The Israeli Companies Law requires that each company that is party to a merger approve the transaction by a vote of the Board of Directors and by a vote of the majority of its outstanding shares, generally excluding shares voted by the other party to the merger or any person holding at least 25% of the other party to the merger, at a shareholders' meeting called on at least 21 days prior notice. In addition, the Israeli Companies Law does not generally require court approval of a merger. Pursuant to the Israeli Companies Law the articles of association of companies such as ours, which have been incorporated prior to February 1, 2000, are deemed to include a provision whereby the approval of a merger requires approval of the transaction by the majority of the shareholders present and voting on the proposed transaction who hold at least 75% of the shares present and voting at such meeting. Upon the request of a creditor to either party to the proposed merger, the court may delay or prevent the merger if it concludes that there exists a reasonable concern that as a result of the merger, the surviving company will be unable to satisfy the obligations of any of the parties to the merger. In addition, a merger may not be completed unless at least 70 days have passed from the time that a proposal for approval of the merger has been filed with the Israeli Registrar of Companies and certain notification and information have been provided to debtors. Notwithstanding the approval requirements set forth in the Israeli Companies Law, companies, such as ours, which have been incorporated prior to the Israeli Companies Law coming into effect, must specifically amend their articles of association to provide for the shareholder voting requirements contained in the Israeli Companies Law. The Israeli Companies Law also provides that an open market acquisition of shares in a public company must be made by means of a tender offer if as a result of the acquisition the purchaser would become a holder of 25% of the voting rights in the company. This rule does not apply if there already is another holder of 25% of the voting rights in the company. Similarly, the Israeli Companies Law provides that an open market acquisition of shares in a public company must be made by means of a tender offer if as a result of the acquisition the purchaser would become the holder of 45% of the voting rights in the company. This rule does not apply if another party already holds more than 50% of the voting rights in the company. Regulations promulgated under the Israeli Companies Law provide that these tender offer requirements do not apply to companies whose shares are listed for trading on a stock exchange outside of Israel only if, according to the laws in the country in which its shares are traded there is either a limitation on the acquisition of a specified percentage of control in the company or the acquisition of a specified percentage of control requires the purchaser to also make a tender offer to the public. The Israeli Companies Law, extends the disclosure requirements applicable to an office holder to a shareholder that holds 25% or more of the voting rights in a public company, including an Israeli company that is publicly traded outside of Israel such as on NASDAQ. Certain transactions between a public company and a 25% shareholder, or transactions in which a 25% shareholder of the company has a personal interest but which are between a public company and another entity, require the approval of the Board of Directors and of the shareholders. Moreover, an extraordinary transaction with a 25% shareholder or the terms of compensation of a 25% shareholder must be approved by the audit committee, the Board of Directors and shareholders. 64 66 The shareholder approval for an extraordinary transaction must include at least one third of the shareholders who have no personal interest in the transaction and are present at the meeting; the transaction can be approved by shareholders without this one third approval, if the total share holdings of those who vote against the transaction do not represent more than 1% of the voting rights in the company. The Israeli Companies Law requires that certain transactions, actions and arrangements be approved as provided for in the Company's Articles of Association, by the Company's Board of Directors, by the audit committee and/or by the Company's shareholders. The vote required by the Audit Committee and the Board for approval of such matters, in each case, is a majority of the disinterested directors participating in a duly convened meeting. C. MATERIAL CONTRACTS Other than the acquisition transaction agreements and related documents discussed in Item 4. "Information on the Company - History and Development of the Company " and in Item 5. "Operating and Financial Review and Prospects - Acquisitions," in the past two years we have not entered into any material contracts other than contracts entered into in the ordinary course of our business. D. EXCHANGE CONTROLS There are no restrictions under Israeli law on the payment of dividends or other distributions in respect of Ordinary Shares and any amounts payable upon the dissolution, liquidation or winding up of our affairs, as well as the proceeds of any sale in Israel of our securities to an Israeli resident are freely repatriable into non-Israeli currencies at the rate of exchange prevailing at the time of conversion, provided that Israeli income tax has been paid on (or withheld from) such payments. Neither our Memorandum of Association, Articles of Association nor the laws of the State of Israel restrict in any way the ownership or voting of shares by non-residents, except with respect to subjects of countries that are in a state of war with Israel. E. TAXATION ISRAELI TAXATION AND INVESTMENT PROGRAMS The following discussion summarizes the material current tax laws of the State of Israel as they relate to the Company, its shareholders and ownership and disposition of its Ordinary Shares. This summary does not discuss all aspects of Israeli tax law that may be relevant to a particular shareholder's personal investment circumstances or to certain types of investors subject to special treatment under Israeli law (for example, traders in securities or persons that own, directly or indirectly, 10% or more of the Company's outstanding voting shares). The following also includes a discussion of certain Israeli government programs benefiting various Israeli businesses such as the Company. To the extent that the discussion is based on new legislation 65 67 still subject to judicial or administrative interpretation, there can be no assurance that the views expressed herein will accord with any such interpretation in the future. In addition, this discussion does not cover all possible tax consequences or situations. Investors should consult with their own tax advisors regarding their personal tax situation. PROPOSED TAX REFORM On May 4, 2000, a committee chaired by the Director General of the Israeli Ministry of Finance issued a report recommending a sweeping reform in the Israeli system of taxation. The proposed reform would significantly alter the taxation of individuals and would also affect corporate taxation. In particular, the proposed reform would reduce but not eliminate, the tax benefits available to approved enterprises such as ours. The Israeli cabinet of the previous government has approved the recommendation in principle. The new Israeli government has declared that it intends to recommend tax reforms but has not approved the May 4, 2000 report or any other alternate reform. Implementation of any reform requires legislation by Israel's Knesset (Parliament). We cannot be certain whether the proposed reform will be adopted, when it will be adopted or what form any reform will ultimately take or what effect it will have on our company. GENERAL CORPORATE TAX STRUCTURE Israeli companies are generally subject to "Company Tax" at the rate of 36.0% of taxable income, such rate having become effective January 1, 1996. However, the effective tax rate payable by a company which derives income from an Approved Enterprise (as further discussed below), may be considerably less. Subject to relevant tax treaties, dividends or interest received by an Israeli corporation from foreign subsidiaries are generally subject to tax regardless of its status as an Approved Enterprise. TAXATION UNDER INFLATIONARY CONDITIONS The Income Tax Law (Adjustment for Inflation), 1985 (the "Adjustment for Inflation Law") attempts to overcome some of the problems experienced in a traditional tax system by an economy experiencing rapid inflation, which was the case in Israel at the time the Adjustment for Inflation Law was enacted. Generally, the Adjustment for Inflation Law was designed to neutralize, for Israeli tax purposes, the erosion of capital investments in businesses and to prevent unintended tax benefits resulting from the deduction of inflationary financing expenses. The Adjustment for Inflation Law applies a supplementary set of inflationary adjustments to a normal taxable profit computed according to regular historical cost principles. The Adjustment for Inflation Law introduced a special adjustment for the preservation of equity for tax purposes based on changes in the Israeli CPI, whereby corporate assets are classified broadly into fixed (inflation resistant) assets and non-fixed assets. Where the shareholders' equity, as defined in the Adjustment for Inflation Law, exceeds the depreciated cost of fixed assets, a corporate tax deduction which takes into account the effect of inflationary change on such excess is allowed (up to a ceiling of 70% of taxable income in any single tax year, with the unused portion permitted to be carried forward on an inflation-linked basis with no ceiling). If 66 68 the depreciated cost of fixed assets exceeds shareholders' equity, then such excess, multiplied by the annual rate of inflation is added to taxable income. In addition, subject to certain limitations, depreciation on fixed assets and loss carry forwards are adjusted for inflation based on changes in the Israeli CPI. The net effect of the Adjustment for Inflation Law on the Company might be that the Company's taxable income, as determined for Israeli corporate tax purposes, would be different from the Company's U.S. dollar income, as reflected in its financial statements, due to the difference between the annual changes in the CPI and in the NIS exchange rate with respect to the U.S. dollar, causing changes in the actual tax rate. CAPITAL GAINS AND INCOME TAXES APPLICABLE TO NON-ISRAELI RESIDENT SHAREHOLDERS Under existing regulations, any capital gain realized by an individual shareholder with respect to the Ordinary Shares acquired on or after the listing of such shares for trading will be exempt from Israeli capital gains tax if the Ordinary Shares are listed on an approved foreign securities market (which includes Nasdaq in the United States), provided that the company continues to qualify as an Industrial Company under Israeli law and that the individual does not hold such shares for business purposes. If the Company does not maintain its status as an Industrial Company, then subject to any applicable tax treaty, the Israeli capital gains tax rates would be up to 50% for non-Israeli resident individuals, and 36% for companies, who are shareholders of the Company. The Tax Reform Committee proposes to institute capital gains tax on the real gains from the sale of securities traded on foreign exchanges (including the securities of Israeli companies traded on Nasdaq) at the rate of up to 25%. Upon a distribution of dividends other than bonus shares (stock dividends), income tax is generally withheld at source at the rate of 25% (or the lower rate payable with respect to Approved Enterprises), unless a double taxation treaty is in effect between Israel and the shareholder's country of residence that provides for a lower tax rate in Israel on dividends. A tax treaty between the United States and Israel (the "Treaty"), provides for a maximum tax of 25% on dividends paid to a resident of the United States (as defined in the Treaty). Dividends distributed by an Israeli company and derived from the income of an Approved Enterprise are subject to a 15% dividend withholding tax. The Treaty further provides that a 12.5% Israeli dividend withholding tax applies to dividends paid to a United States corporation owning 10% or more of an Israeli company's voting shares throughout the current year to the date the dividend is paid and the preceding taxable year (as applicable). The 12.5% rate applies only on dividends from a company that does not have any projects with Approved Enterprise status in the applicable period. If for any reason shareholders do not receive the above exemption for a sale of shares in an Industrial Company, the Treaty provides U.S. resident investors with an exemption from Israeli capital gains tax in certain circumstances (there may still be U.S. taxes) upon a disposition of shares in the Company if they held under 10% of the Company's voting stock throughout the 12 months prior to the share disposition. If Israeli capital gains tax is payable, it can be credited against a shareholder's U.S. federal tax under the circumstances specified in the Treaty. A non-resident of Israel who has had dividend income derived or accrued in Israel from which the applicable tax was withheld at source is currently exempt from the duty to file an annual 67 69 Israeli tax return with respect to such income, provided such income was not derived from a business carried on in Israel by such non-resident and that such non-resident does not derive other non-passive income from sources in Israel. LAW FOR THE ENCOURAGEMENT OF INDUSTRY (TAXES), 1969 The Company currently qualifies as an "Industrial Company" within the meaning of the Law of the Encouragement of Industry (Taxes), 1969 (the "Industry Encouragement Law") According to the Industry Encouragement Law, an "Industrial Company" is a company resident in Israel, at least 90% of the income of which in any tax year, determined in Israeli currency (exclusive of income from defense loans, capital gains, interest and dividends) is derived from an "Industrial Enterprise" that it owns. An "Industrial Enterprise" is defined by that law as an enterprise whose major activity in a given tax year is industrial production activity. Included among the tax benefits for an Industrial Company are deductions of 12.5% per annum of the purchase price of a patent or of know-how, an election under certain conditions to file a consolidated return and accelerated depreciation rates on equipment and buildings. Eligibility for the benefits under the Industry Encouragement Law is not subject to receipt of prior approval from any governmental authority. No assurance can be given that the Company will continue to qualify as an "Industrial Company" or that the benefits described above will be available in the future. LAW FOR THE ENCOURAGEMENT OF CAPITAL INVESTMENTS, 1959 The Law for the Encouragement of Capital Investments, 1959, as amended (the "Investment Law"), provides that a capital investment in production facilities (or other eligible facilities) may, upon application to the Israel Investment Center, be designated as an Approved Enterprise. Each certificate of approval for an Approved Enterprise relates to a specified capital investment program delineated both by its financial scope, including its capital sources, and its physical characteristics, i.e. the equipment to be purchased and utilized pursuant to the program. The tax benefits derived from any such certificate of approval relate only to taxable profits attributable to the specific Approved Enterprise. Taxable income derived from an Approved Enterprise is subject to a reduced corporate tax rate of 25% (the "Corporate Tax"). Such income is eligible for further reductions in tax rates depending on the percentage of the foreign investment in the company's share capital (conferring rights to profits, voting and appointment of directors) and of its combined share and loan capital which is owned by non-Israeli residents. The tax rate is 20% if the foreign investment is 49% or more but less than 74%; 15% if the foreign investment is 74% or more but less than 90%; and 10% if the foreign investment is 90% or more. The lowest level of foreign investment during the year is used to determine the relevant tax rate for that year. These tax benefits are granted for a limited period not exceeding 7 or 10 years from the first year in which the Approved Enterprise has taxable income. The period of benefits may in no event, however, exceed the lesser of twelve years from the year in which production commenced or fourteen years from the year of receipt of Approved Enterprise status. 68 70 A company that has an Approved Enterprise status which was approved after April 1, 1986 may elect to forego any entitlement to the grants otherwise available under the Investment Law and, in lieu of the foregoing, participate in an alternative benefits program (the "Alternative Benefits Program"), under which the undistributed income from the Approved Enterprise is fully tax exempt for a defined period of time. The period of tax exemption ranges between 2 and 10 years, depending upon the location within Israel of the Approved Enterprise and the type of Approved Enterprise. The Tax Reform Committee has proposed that the company tax rate be increased from 0% to 10% during the exemption period. On the expiration of the exemption period, the Approved Enterprise would be eligible for beneficial tax rates under the Investment Law for the remainder, if any, of the otherwise applicable benefits period. The Company elected to participate in the Alternative Benefits Program. There can be no assurance that the current Alternative Benefits Program will continue to be available or that the Company will qualify for the benefits under the current program. A company that has elected to participate in the Alternative Benefits Program and that subsequently pays a dividend out of the income derived from the Approved Enterprise during the tax exemption period will be subject to Corporate Tax (in the year in which the dividend is distributed) with respect to the amount distributed (plus withholding tax thereon) at the rate that would have been applicable in the year in which the distributed income was generated had the company not been exempt from tax in such year. The dividend recipient is taxed at the reduced rate of 15% applicable to dividends from Approved Enterprise if the dividend is distributed within twelve years after the tax exemption period. The withholding tax rate will be 25% after such period. In case of a company with over 25% foreign shareholding (as defined by law), the twelve-year limitation on reduced withholding tax on dividends does not apply. This tax should be withheld by a company at source, regardless of whether the dividend is converted into foreign currency. The Company has been granted "Approved Enterprise" status under the Investment Law with respect to four projects. Pursuant to the provisions of the Investment Law, the Company chose the Alternative Benefits Program which, as discussed above, provides for the waiver of grants in return for tax-exemption. Accordingly, income derived from each Approved Enterprise is tax-exempt for a period of two to four years, commencing with the year it first earns taxable income, and is then subject to Corporate Tax at the rate of 25%, for additional periods of six to eight years. The Investment Law also provides that a company with an Approved Enterprise is entitled to accelerated depreciation on its property and equipment included in an approved investment program. Future applications to the Investment Center will be reviewed separately, and decisions as to whether or not to approve such applications will be based, among other things, on the then prevailing criteria set forth in the Investment Law, on the specific objectives of the applicant company set forth in such applications and on certain financial criteria of the applicant company. Accordingly, there can be no assurance that any such applications will be approved. In addition, the benefits available to an Approved Enterprise are conditional upon the fulfillment of certain conditions stipulated in the Investment Law and its regulations and the criteria set forth in the specific certificate of approval, as described above. In the event that these conditions are violated, in whole or in part, the Company would be required to refund the amount of tax benefits, plus the CPI linkage adjustment and interest. 69 71 TAX BENEFITS FOR RESEARCH AND DEVELOPMENT Under certain conditions, Israeli tax law allows a tax deduction in the year incurred for expenditures (including depreciation on capital expenditures but excluding depreciable capital expenditures) in connection with scientific research and development projects, if the expenditures are approved by the relevant Israeli Government Ministry (determined by the field of research) and the research and development is for the promotion of the enterprise. Expenditures not so approved are deductible over a three-year period. However, expenditures made out of the proceeds of government grants are not deductible, i.e. the Company will be able to deduct the unfunded portion of the research and development expenditures but not the gross amount. LAW FOR THE ENCOURAGEMENT OF INDUSTRIAL RESEARCH AND DEVELOPMENT, 1984 Under the Law for the Encouragement of Industrial Research and Development, 1984, (the "Research Law") and the Instructions of the Director General of the Ministry of Industry and Trade, research and development programs, plans for the intermediate stage between research and development, and manufacturing and sales approved by a governmental committee of the Office of the Chief Scientist (OCS) (the "Research Committee") are eligible for grants of up to 50% of the project's expenditure, if they meet certain criteria. These grants are issued in return for the payment of royalties from the sale of products developed in accordance with the program as follows: 3% of revenues during the first three years (3.5% for the year 2000 only), 4% of revenues during the following three years, and 5% of revenues in the seventh year and thereafter, with the total royalties not to exceed 100% of the dollar value of the OCS grant (or in some cases up to 300%). Following the full payment of such royalties, there is no further liability for payment. The Israeli government further requires that products developed with government grants are to be manufactured in Israel. However, in the event that any portion of the manufacturing is not conducted in Israel, if approval is received from the OCS, the company would be required to pay royalties that are adjusted in proportion to manufacturing outside of Israel as follows: when the manufacturing is performed outside of Israel by the company or an affiliate company, the royalties are to be paid as described above with the addition of 1%, and when the manufacturing outside of Israel is not performed by the company or an affiliate the royalties paid shall be equal to the ratio of the amount of grant received from the OCS divided by the amount of grant received from the OCS and the investment(s) made by the company in the project. The payback also will be adjusted to 120%, 150% or 300% of the grant if the portion of manufacturing that is performed outside of Israel is up to 50%, between 50% and 90%, or more than 90%, respectively. The technology developed pursuant to the terms of these grants may not be transferred to third parties without the prior approval of the Research Committee. Such approval is not required for the export of any products resulting from such research or development. Approval of the transfer of technology may be granted only if the recipient abides by all the provisions of the Research Law and the regulations promulgated thereunder, including the restrictions on the transfer of know-how and the obligation to pay royalties in an amount that may be increased. 70 72 In order to meet certain conditions in connection with the grants and programs of the OCS, the Company has made certain representations to the Israeli government about the Company's future plans for its Israeli operations. From time to time, the extent of the Company's Israeli operations has differed and may in the future differ, from the Company's representations. If, after receiving grants under certain programs, the Company fails to meet certain conditions to those benefits, including, with respect to grants received from the OCS, the maintenance of a material preserve in Israel, or if there is any material deviation from the representations made by the Company to the Israeli government, the Company could be required to refund to the State of Israel tax or other benefits previously received (including interest and CPI linkage difference) and would likely be denied receipt of such grants or benefits, and participation of such programs, thereafter. The Company participates in programs sponsored by the OCS for the support of research and development activities (See notes to the Financial Statements). Each application to the OCS is reviewed separately, and grants are based on a program approved by the Research Committee. Expenditures supported under other incentive programs of the State of Israel are not eligible for OCS grants. As a result, there can be no assurance that applications to the OCS will be approved or, if approved, what the amounts of the grants will be. FUND FOR THE ENCOURAGEMENT OF MARKETING ACTIVITIES The Company has received grants relating to its overseas marketing expenses from the Marketing Fund. These grants are awarded for specific expenses incurred by the Company for overseas marketing and are based upon the expenses reported by the Company to the Marketing Fund. All marketing grants recorded from the Marketing Fund until 1997 are linked to the dollar and are repayable as royalties at the rate of 3% of the amount of increases in export sales realized by the Company from the Marketing Fund. Grants recorded beginning January 1, 1998 bear royalties of 4% plus interest at LIBOR rates. The Company will be required to pay royalties on grants from the Marketing Fund only to the extent that it actually achieves increases in export sales. The proceeds of these grants are presented in the Company's consolidated financial statements as offsets to marketing expenses. Through December 31, 2000, the Company had received grants from the Marketing Fund in the amount of approximately $430,000. At March 31, 2001, the aggregate contingent liability was approximately $418,000. UNITED STATED FEDERAL INCOME TAX CONSIDERATIONS The following summary describes certain of the material U.S. Federal income tax consequences to U.S. Holders (as defined below) arising from the purchase, ownership and disposition of Ordinary Shares. This summary is based on the provisions of the Internal Revenue Code of 1986, as amended (the "Code"), final, temporary and proposed U.S. Treasury Regulations promulgated thereunder, and administrative and judicial interpretations thereof, all as in effect as of the date hereof, and all of which are subject to change, possibly with retroactive effect. This summary does not deal with all aspects of U.S. Federal income taxation that may be relevant to particular U.S. Holders in light of their particular circumstances, or to U.S. Holders subject to special rules, including, without limitation, certain retirement plans, insurance companies, U.S. Holders of securities held as part of a "straddle," "synthetic security," "hedge", 71 73 "conversion transaction" or other integrated investment, persons that enter into "constructive sales" involving Ordinary Shares or substantially identical property with other investments, U.S. Holders whose functional currency is not the United States dollar, certain expatriates or former long-term residents of the United States, financial institutions, broker-dealers, tax-exempt organizations and U.S. Holders who own (directly, indirectly or through attribution) 10% or more of the Company's outstanding voting stock. The following discussion does not address the effect of any applicable state, local or foreign tax laws. This summary does not consider the tax treatment of persons who own Ordinary Shares through a partnership or other pass-through entity, and deals only with Ordinary Shares held as "capital assets" as defined in Section 1221 of the Code. This discussion is addressed only to "U.S. Holders." A U.S. Holder is a holder of Ordinary Shares that is a U.S. citizen, an individual resident in the United States for U.S. Federal income tax purposes, a domestic corporation, an estate the income of which is includible in its gross income for U.S. Federal income tax purposes without regard to its source, or a trust if either: (i) a U.S. court is able to exercise primary supervision over the administration of the trust and one or more U.S. persons have the authority to control all the substantial decisions of the trust or (ii) the trust was in existence on August 20, 1996 and, in general, would have been treated as a U.S. Holder under rules applicable prior to such time, provided the trust elects to continue such treatment thereafter. U.S. HOLDERS OF ORDINARY SHARES ARE ADVISED TO CONSULT WITH THEIR OWN TAX ADVISORS WITH RESPECT TO THE U.S. FEDERAL, STATE AND LOCAL TAX CONSEQUENCES, AS WELL AS THE TAX CONSEQUENCES IN OTHER JURISDICTIONS, OF THE PURCHASE, OWNERSHIP AND SALE OF ORDINARY SHARES APPLICABLE IN THEIR PARTICULAR TAX SITUATIONS. TAXATION OF DIVIDENDS The gross amount of any distributions received with respect to Ordinary Shares, including the amount of any Israeli taxes withheld therefrom, will constitute dividends for U.S. Federal income tax purposes, to the extent of our current and accumulated earnings and profits as determined for U.S. Federal income tax principles. You will be required to include this amount of dividends in gross income as ordinary income. Distributions in excess of our earnings and profits will be treated as a non-taxable return of capital to the extent of your tax basis in the Ordinary Shares, and any amount in excess of your tax basis will be treated as gain from the sale of Ordinary Shares. See "--Disposition of Ordinary Shares" below for the discussion on the taxation of capital gains. Dividends will not qualify for the dividends-received deduction generally available to corporations under Section 243 of the Code. Dividends that we pay in NIS, including the amount of any Israeli taxes withheld therefrom, will be included in your income in a U.S. dollar amount calculated by reference to the exchange rate in effect on the day such dividends are received. A U.S. Holder who receives payment in NIS and converts NIS into U.S. dollars at an exchange rate other than the rate in effect on such day may have a foreign currency exchange gain or loss that would be treated as ordinary income or loss. U.S. Holders should consult their own tax advisors concerning the U.S. tax consequences of acquiring, holding and disposing of NIS. 72 74 Any Israeli withholding tax imposed on such dividends will be a foreign income tax eligible for credit against a U.S. Holder's U.S. Federal income tax liability, subject to certain limitations set out in the Code (or, alternatively, for deduction against income in determining such tax liability). The limitations set out in the Code include computational rules under which foreign tax credits allowable with respect to specific classes of income cannot exceed the U.S. Federal income taxes otherwise payable with respect to each such class of income. Dividends generally will be treated as foreign-source passive income or financial services income for United States foreign tax credit purposes. Foreign income taxes exceeding the credit limitation for the year of payment or accrual may be carried back for two taxable years and forward for five taxable years in order to reduce U.S. Federal income taxes, subject to the credit limitation applicable in each of such years. Other restrictions on the foreign tax credit include a prohibition on the use of the credit to reduce liability for the U.S. individual and corporation alternative minimum taxes by more than 90%. A U.S. Holder will be denied a foreign tax credit with respect to Israeli income tax withheld from dividends received on the Ordinary Shares to the extent such U.S. Holder has not held the Ordinary Shares for at least 16 days of the 30-day period beginning on the date which is 15 days before the ex-dividend date or to the extent such U.S. Holder is under an obligation to make related payments with respect to substantially similar or related property. Any days during which a U.S. Holder has substantially diminished its risk of loss on the Ordinary Shares are not counted toward meeting the 16-day holding period required by the statute. The rules relating to the determination of the foreign tax credit are complex, and you should consult with your personal tax advisors to determine whether and to what extent you would be entitled to this credit. DISPOSITIONS OF ORDINARY SHARES If you sell or otherwise dispose of Ordinary Shares, you will recognize gain or loss for U.S. Federal income tax purposes in an amount equal to the difference between the amount realized on the sale or other disposition and the adjusted tax basis in the Ordinary Shares. Subject to the discussion below under the heading "Passive Foreign Investment Companies," such gain or loss generally will be capital gain or loss and will be long-term capital gain or loss if you have held the Ordinary Shares for more than one year at the time of the sale or other disposition. In general, any gain that you recognize on the sale or other disposition of Ordinary Shares will be U.S.-source for purposes of the foreign tax credit limitation; losses, will generally be allocated against U.S. source income. Deduction of capital losses is subject to certain limitations under the Code. In the case of a cash basis U.S. Holder who receives NIS in connection with the sale or disposition of Ordinary Shares, the amount realized will be based on the U.S. dollar value of the NIS received with respect to the Ordinary Shares as determined on the settlement date of such exchange. A U.S. Holder who receives payment in NIS and converts NIS into United States dollars at a conversion rate other than the rate in effect on the settlement date may have a foreign currency exchange gain or loss that would be treated as ordinary income or loss. An accrual basis U.S. Holder may elect the same treatment required of cash basis taxpayers with respect to a sale or disposition of Ordinary Shares, provided that the election is applied consistently from year to year. Such election may not be changed without the consent of the Internal Revenue Service (the "IRS"). In the event that an accrual basis U.S. Holder does not 73 75 elect to be treated as a cash basis taxpayer (pursuant to the Treasury regulations applicable to foreign currency transactions), such U.S. Holder may have a foreign currency gain or loss for U.S. Federal income tax purposes because of differences between the U.S. dollar value of the currency received prevailing on the trade date and the settlement date. Any such currency gain or loss would be treated as ordinary income or loss and would be in addition to gain or loss, if any, recognized by such U.S. Holder on the sale or disposition of such Ordinary Shares. PASSIVE FOREIGN INVESTMENT COMPANIES For U.S. Federal income tax purposes, we will be considered a passive foreign investment company ("PFIC") for any taxable year in which either (1) 75% or more of our gross income is passive income, or (ii) at least 50% of the average value of all of our assets for the taxable year produce or are held for the production of passive income. For this purpose, passive income includes dividends, interest, royalties, rents, annuities and the excess of gains over losses from the disposition of assets which produce passive income. If we were determined to be a PFIC for U.S. Federal income tax purposes, highly complex rules would apply to U.S. Holders owning Ordinary Shares. Accordingly, you are urged to consult your tax advisors regarding the application of such rules. Based on our current and projected income, assets and activities, we believe that we are not currently a PFIC nor do we expect to become a PFIC in the foreseeable future. However, because the determination of whether we are a PFIC is determined as of the end of each taxable year and is dependent on a number of factors, including the value of our assets (based on the market price of our Ordinary Shares) and the amount and type of our gross income, there can be no assurances that we will not become a PFIC for any future taxable year. If we are treated as a PFIC for any taxable year, then, unless you elect either to treat your investment in Ordinary Shares as an investment in a "qualified electing fund" (a "QEF election") or to "mark-to-market" your Ordinary Shares, as described below, - you would be required to allocate income recognized upon receiving certain dividends or gain recognized upon the disposition of Ordinary Shares ratably over the holding period for such Ordinary Shares, - the amount allocated to each year during which we are considered a PFIC other than the year of the dividend payment or disposition would be subject to tax at the highest individual or corporate tax rate, as the case may be, and an interest charge would be imposed with respect to the resulting tax liability allocated to each such year, - gain recognized upon the disposition of Ordinary Shares would be taxable as ordinary income and - you would be required to make an annual return on IRS Form 8621 regarding distributions received with respect to Ordinary Shares and any gain realized on your Ordinary Shares. 74 76 If you make either a timely QEF election or a timely mark-to-market election in respect of your Ordinary Shares, you would not be subject to the rules described above. If you make a timely QEF election, you would be required to include in your income for each taxable year your pro rata share of our ordinary earnings as ordinary income and your pro rata share of our net capital gain as long-term capital gain, whether or not such amounts are actually distributed to you. You would not be eligible to make a QEF election unless we comply with certain applicable information reporting requirements. Alternatively, if you elect to "mark-to-market" your Ordinary Shares, you will generally include in income any excess of the fair market value of the Ordinary Shares at the close of each tax year over your adjusted basis in the Ordinary Shares. If the fair market value of the Ordinary Shares had depreciated below your adjusted basis at the close of the tax year, you may generally deduct the excess of the adjusted basis of the Ordinary Shares over its fair market value at that time. However, such deductions generally would be limited to the net mark-to-market gains, if any, that you included in income with respect to such Ordinary Shares in prior years. Income recognized and deductions allowed under the mark-to-market provisions, as well as any gain or loss on the disposition of Ordinary Shares with respect to which the mark-to-market election is made, is treated as ordinary income or loss. BACKUP WITHHOLDING AND INFORMATION REPORTING Payments in respect of Ordinary Shares may be subject to information reporting to the U.S. Internal Revenue Service and to a 31 percent U.S. backup withholding tax. Backup withholding will not apply, however, if you (i) are a corporation or come within certain exempt categories, and demonstrate the fact when so required, or (ii) furnish a correct taxpayer identification number and make any other required certification. Any amount withheld under these rules may be credited against your federal income tax liability. Backup withholding is not an additional tax. Amounts withheld under the backup withholding rules may be credited against a U.S. Holder's U.S. tax liability, and a U.S. Holder may obtain a refund of any excess amounts withheld under the backup withholding rules by filing the appropriate claim for refund with the IRS. Any U.S. holder who holds 10% or more in vote or value of our Ordinary Shares will be subject to certain additional United States information reporting requirements. U.S. GIFT AND ESTATE TAX An individual U.S. Holder of Ordinary Shares will be subject to U.S. gift and estate taxes with respect to Ordinary Shares in the same manner and to the same extent as with respect to other types of personal property. F. DIVIDEND AND PAYING AGENTS Not applicable. 75 77 G. STATEMENT BY EXPERTS Not applicable. H. DOCUMENTS ON DISPLAY This Annual Report and the exhibits thereto and any other document we file pursuant to the Exchange Act may be inspected without charge and copied at prescribed rates at the following Securities and Exchange Commission public reference rooms: 450 Fifth Street, N.W., Judiciary Plaza, Room 1024, Washington, D.C. 20549; Seven World Trade Center, Suite 1300, New York, NY 10048; Room 3190, Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, IL 60661. You may obtain information on the operation of the Securities and Exchange Commission's public reference room in Washington, D.C. by calling the Securities and Exchange Commission at 1-800-SEC-0330. The Exchange Act file number for our Securities and Exchange Commission filings is 0-29538. The documents concerning our company which are referred to in this Annual Report may also be inspected at our offices located at Gav-Yam Center No. 3, 9 Shenkar St., Herzlia B 46120, Israel. I. SUBSIDIARY INFORMATION Not applicable. ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK CURRENCY FLUCTUATIONS Approximately 90% of our revenue is in US dollars, or linked to the US dollar, and therefore the dollar is our functional currency. Approximately 50% of our operating expenses are paid in US dollars or are linked to US dollars. Other significant currencies in which we receive revenue or pay expenses are Australian dollars, British pounds, Canadian dollars, the European Monetary Union currency ("euro"), Russian Rubles and Israeli shekels. Historically, the effect of fluctuations in currency exchange rates has had a minimal impact on our operations. As we expand our operations outside of the United States and receive revenue and pay expenses in currencies other than the US dollar, our exposure to fluctuations in currency exchange rates could increase. In managing our foreign exchange risk, where we believe appropriate, we enter into various foreign exchange contracts. As of December 31, 2000, we had entered into hedging transactions only in regard to our New Israeli Shekel/ US dollar exposure, which was our most significant exposure. FOREIGN CURRENCY RISK Market risks relating to our operations may result from changes in interest rates, foreign currency exchange rates and weak economic conditions in foreign markets. In general, we do not invest in foreign currency or engage in interest-risk hedging or other risk-related tradable financial instruments, and we do not hold any derivative financial instruments. 76 78 Where we believe appropriate, we enter into foreign exchange forward contracts to hedge some of our foreign currency exposure. We use such contracts to hedge exposure to changes in foreign currency exchange rates associated with revenue denominated in a foreign currency and anticipated costs to be incurred in a foreign currency. We seek to minimize the risk that the fair value of sales of our products and services and cash flow required for our expenses denominated in a currency other than our functional currency, the dollar, will be affected by changes in exchange rates. INTEREST RATE RISK Our interest expenses and income are sensitive to changes in interest rates, as all of our cash reserves and borrowings are subject to interest rate changes. Excess liquidity is invested in short-term interest-bearing investments, consisting primarily of short term bank deposits, which bear minimal interest rate risk. As of December 31, 2000, our total outstanding indebtedness in regard to short-term debt and current maturities of long term bank loans was approximately $ 7.6 million, in regard to medium term bank loans was $ 1.3 million, and in connection with capital lease obligations was $ 1.3 million. In the aggregate, this indebtedness bears a minimal interest rate risk. ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES Not applicable. PART II ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES None. ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS In November 2000, our shareholders approved the adoption of an amended and restated Articles of Association (the "Amended Articles"). The principal amendments modifying shareholder rights and which are not mandated by law can be summarized as follows: - The Board of Directors has the authority to declare dividends to our shareholders (our previous Articles of Association required shareholder approval). - All decisions which under the previous Articles of Association and the Israeli law in force until February 1, 2000, required that the amendments to the Articles of Associations and a number of other decisions such as the increase of share capital, share splits and other recapitalizations required the approval of at least 75% of our shareholders present and voting at a special meeting of shareholders. As permitted under the new Israeli Companies Law, the Amended Articles provide that these decisions require a simple majority of shareholders present and voting at any shareholders meeting (with the 77 79 exception of Article 100 which deals with certain business combinations the amendment of which requires the affirmative vote of at least 75% of our shareholders present (in person or by proxy) at the Meeting and voting on the resolution) . - We are permitted to purchase our own shares in certain circumstances (this was previously prohibited). PART III ITEM 17. FINANCIAL STATEMENTS Not applicable. ITEM 18 - FINANCIAL STATEMENTS AND EXHIBITS The following consolidated financial statements and related auditors report are filed as part of this Annual Report. Index to Financial Statements: 1. Report of Independent Auditors...................... F-2 2. Consolidated Balance Sheets......................... F-3 3. Consolidated Statements of Operations............... F-5 4. Statements of Changes in Shareholders' Equity....... F-6 5. Consolidated Statements of Cash Flows............... F-7 6. Notes to the Financial Statements................... F-9 ITEM 19 - EXHIBITS The following exhibits are filed as part of this Annual Report: EXHIBITS NO. EXHIBIT 1.1++* Memorandum of Association. 1.2# Amended and Restated Articles of Association. 2.1* Form of Warrant Agreement, dated as of October 10, 1997, between Paradigm Geophysical Ltd. and the Bridge Loan lenders. 2.2* Form of Warrant Certificate by Paradigm Geophysical Ltd. in favor of the Bridge Loan lenders. 2.3* Form of 1994 Warrant issued in connection with a private placement of Paradigm Geophysical Ltd.'s securities. 2.4*** Registration Rights Agreement, dated March 12, 1999, by and among Paradigm Geophysical Ltd., Jerusalem Venture Partners L.P. and Jerusalem Venture Partners (Israel) L.P. 2.5*** Registration Rights Agreement, dated April 14, 1999, by and among Paradigm Geophysical Ltd., Shamrock Holdings, Inc., Eastgate Fund L.P., Eastgate International Limited, Mr. Harris Kaplan and Berman Eastgate Growth Fund. 4.1** Stock Purchase Agreement, dated as of September 5, 1997, as amended September 24, 1997, among Paradigm Geophysical Ltd., Paradigm Geophysical Corp. and GeoScience Corporation. 4.2* Key Employee Plan. 78 80 4.3* May 1994 Stock Option Plan. 4.4* 1994 General Stock Option Plan. 4.5* 1997 Executive Stock Option Plan. 4.6* 1997 Stock Option Plan for Qualifying Israel Employees. 4.7* 1997 Stock Option Plan for U.S. Employees. 4.8*** Amended and Restated Asset Purchase Agreement, dated February 3,1999, by and among Geotech Joint Stock Company and Dr. Nikolai L. Baransky, Dr. Evgenii A. Kozlov, Mr. Dimitry V. Sulitsky, Mr. Christopher D. Kim, Paradigm Geophysical (U.K.) Ltd., Paradigm Geophysical Europe Ltd., Paradigm Geophysical Services Ltd. and Paradigm Geophysical Ltd. 4.9*** Business Sale Agreement, dated March 31, 1999, by and among Mincom Limited, Mincom Inc., Mincom International Pty Limited, Mincom Pty Ltd., Mincom Services Pty Ltd., Mincom Inc. and Paradigm Geophysical Ltd. 4.10*** Share Purchase Agreement, dated March 12, 1999, by and among Paradigm Geophysical Ltd., Jerusalem Venture Partners L.P. and Jerusalem Venture Partners (Israel) L.P. 4.11*** Share Purchase Agreement, dated April 14, 1999, by and between Paradigm Geophysical Ltd. and Shamrock Holdings, Inc. 4.12*** Share Purchase Agreement, dated April 14, 1999, between Paradigm Geophysical Ltd. and Eastgate Fund L.P., Eastgate International Limited, Mr. Harris Kaplan and Berman Eastgate Growth Fund. 4.13# Securities Purchase Agreement, dated October 4, 2000, by and between Compagnie Generale de Geophysique and Paradigm Geophysical Ltd. and Paradigm Geophysical Corp. with respect to Flagship S.A. and Flagship Geosciences LLC. 4.14**** Share Purchase Agreement, dated May 16 2001, by and between Paradigm Geophysical Ltd. and Peter David Raby regarding the purchase of the entire issued share capital of Sysdrill Ltd. 8.1# Subsidiaries of Paradigm Geophysical Ltd. 10.1# Consent of Kost Forer and Gabbay. - -------------------- ++ English translations from Hebrew original. 79 81 * Incorporated herein by reference to Paradigm Geophysical Ltd.'s Registration Statement on Form F-1 (File No. 333-7926), filed with the Commission on November 10, 1997. ** Incorporated herein by reference to Amendment No. 1 to Paradigm Geophysical Ltd.'s Registration Statement on Form F-1 (File No. 333-7926), filed with the Commission on November 21, 1997. *** Incorporated herein by reference to Paradigm Geophysical Ltd.'s Annual Report on Form 20-F for the fiscal year ended June 30, 1999. **** Incorporated herein by reference to Paradigm Geophysical Ltd.'s Report on Form 6-K for the month of May 2001. # Filed herewith. SIGNATURES The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf. PARADIGM GEOPHYSICAL LTD. By: /s/ Brian Berman ----------------------- Brian Berman Chief Financial Officer Date: June 29, 2001 80 82 PARADIGM GEOPHYSICAL LTD. AND ITS SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2000 IN U.S. DOLLARS INDEX
PAGE --------- REPORT OF INDEPENDENT AUDITORS F-2 CONSOLIDATED BALANCE SHEETS F-3 - F-4 CONSOLIDATED STATEMENTS OF OPERATIONS F-5 STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY F-6 CONSOLIDATED STATEMENTS OF CASH FLOWS F-7 - F-8 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-9 - F-34
83 [ERNST & YOUNG LETTERHEAD] REPORT OF INDEPENDENT AUDITORS TO THE SHAREHOLDERS OF PARADIGM GEOPHYSICAL LTD. We have audited the accompanying consolidated balance sheets of Paradigm Geophysical Ltd. ("the Company") and its subsidiaries as of December 31, 1999 and 2000, and the related consolidated statements of operations, changes in shareholders' equity and cash flows for each of the three years in the period ended December 31, 2000. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We did not audit the financial statements of Paradigm Geophysical (U.K), a wholly-owned subsidiary, which statements reflect total assets constituting 13% of total consolidated assets as of December 31, 1999, and total revenues constituting 26% and 22% of total consolidated revenues for the years ended December 31, 1998 and 1999, respectively. Those statements were audited by other auditors whose reports have been furnished to us, and our opinion, insofar as it relates to data included for Paradigm Geophysical (U.K.) is based solely on the reports of the other auditors. We did not audit the financial statements of Paradigm Geophysical (Singapore) Pte Ltd., a wholly-owned subsidiary which statements reflect total revenues constituting 13% of total consolidated revenues for the year ended December 31, 1998. Those statements were audited by other auditors whose reports have been furnished to us, and our opinion, insofar as it relates to the amounts included for Paradigm (Singapore) Pte. Ltd., is based solely on the reports of the other auditors. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits and the reports of the other auditors provide a reasonable basis for our opinion. In our opinion, based on our audits and the reports of the other auditors, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company and its subsidiaries as of December 31, 1999 and 2000, and the consolidated results of their operations and cash flows for each of the three years in the period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States. Tel-Aviv, Israel KOST FORER & GABBAY January 22, 2001 A Member of Ernst & Young International F - 2 84 PARADIGM GEOPHYSICAL LTD. AND ITS SUBSIDIARIES CONSOLIDATED BALANCE SHEETS - -------------------------------------------------------------------------------- U.S. DOLLARS IN THOUSANDS
DECEMBER 31, ------------------------------- 1999 2000 ---------- ---------- ASSETS CURRENT ASSETS: Cash and cash equivalents $ 5,457 $ 8,647 Trade receivables (net of allowance for doubtful accounts of $ 1,666 in 1999 and $ 2,950 in 2000) 21,612 22,707 Accrued income 9,012 4,077 Other receivables and prepaid expenses 2,443 4,110 ---------- ---------- Total current assets 38,524 39,541 ---------- ---------- LONG-TERM TRADE RECEIVABLES 54 221 ---------- ---------- SEVERANCE PAY FUND 861 1,076 ---------- ---------- PROPERTY AND EQUIPMENT, NET 12,007 13,318 ---------- ---------- OTHER ASSETS, NET 14,719 25,605 ---------- ---------- $ 66,165 $ 79,761 ========= =========
The accompanying notes are an integral part of the consolidated financial statements. F - 3 85 PARADIGM GEOPHYSICAL LTD. AND ITS SUBSIDIARIES CONSOLIDATED BALANCE SHEETS - -------------------------------------------------------------------------------- U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE DATA
DECEMBER 31, ----------------------------- 1999 2000 -------- -------- LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Short-term bank loans $ 2,000 $ 4,528 Current maturities of long-term bank loans 2,639 3,112 Current maturities of capital lease obligations 434 546 Trade payables 2,774 6,045 Other payables and accrued expenses 8,792 9,931 Deferred revenues 6,539 4,519 -------- -------- Total current liabilities 23,178 28,681 -------- -------- LONG TERM LIABILITIES: Long-term bank loans, net of current maturities 3,923 1,277 Capital lease obligations, net of current maturities 742 206 Other lease obligations 759 517 Accrued severance pay 1,650 2,338 Deferred income tax liability 445 273 -------- -------- Total long-term liabilities 7,519 4,611 -------- -------- SHAREHOLDERS' EQUITY: Share capital: Authorized - 18,000,000 Ordinary shares of NIS 0.5 par value; 2,000,000 Preferred shares of NIS 0.5 par value as of December 31, 1999 and 2000 Issued and outstanding - 13,026,336 Ordinary shares as of December 31, 1999 and 14,691,904 Ordinary shares as of December 31, 2000 2,064 2,273 Additional paid-in capital 51,903 60,954 Accumulated other comprehensive loss (1,166) (1,784) Accumulated deficit (17,333) (14,974) -------- -------- Total shareholders' equity 35,468 46,469 -------- -------- $ 66,165 $ 79,761 ======== ========
The accompanying notes are an integral part of the consolidated financial statements. F - 4 86 PARADIGM GEOPHYSICAL LTD. AND ITS SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS - -------------------------------------------------------------------------------- U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA
YEAR ENDED DECEMBER 31, -------------------------------------------------- 1998 1999 2000 -------- -------- -------- Revenues: Products $ 38,074 $ 43,023 $ 46,390 Services 7,288 11,483 16,908 -------- -------- -------- Total revenues 45,362 54,506 63,298 -------- -------- -------- Operating expenses: Cost of products 8,559 12,418 10,816 Cost of services 3,107 5,804 6,352 Research and development 7,660 9,306 11,215 Sales and marketing, general and administrative 15,822 20,638 23,518 Depreciation 2,298 3,865 4,746 Amortization of intangible assets 2,347 3,064 3,360 Non recurring expenses -- 2,705 -- -------- -------- -------- Total operating expenses 39,793 57,800 60,007 -------- -------- -------- Operating income (loss) 5,569 (3,294) 3,291 Financial expenses, net (661) (484) (552) -------- -------- -------- Income (loss) before taxes on income 4,908 (3,778) 2,739 Taxes on income 356 -- 380 -------- -------- -------- Net income (loss) $ 4,552 $ (3,778) $ 2,359 ======== ======== ======== Basic net earnings (loss) per share $ 0.66 $ (0.31) $ 0.17 ======== ======== ======== Diluted net earnings (loss) per share $ 0.49 $ (0.31) $ 0.17 ======== ======== ========
The accompanying notes are an integral part of the consolidated financial statements. F - 5 87 PARADIGM GEOPHYSICAL LTD. AND ITS SUBSIDIARIES STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY - -------------------------------------------------------------------------------- U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE DATA
PREFERRED SHARES ORDINARY SHARES SHARES AMOUNT SHARES AMOUNT --------- ------ ---------- -------- Balance as of January 1, 1998 4,735,802 $ 765 2,328,682 $ 521 Comprehensive income (loss): Net income - - - - Foreign currency translation adjustments - - - - Total comprehensive income Issuance of Ordinary shares, net - - 3,350,000 458 Exercise of over-allotment - - 100,000 14 Conversion of Preferred shares into Ordinary shares (4,735,802) (765) 4,735,802 765 --------- ------ ---------- -------- Balance as of December 31, 1998 - - 10,514,484 1,758 Comprehensive loss: Net loss - - - - Foreign currency translation adjustments - - - - Total comprehensive loss Issuance of Ordinary shares, net - - 2,017,544 246 Issuance of shares upon exercise of warrants - - 479,908 58 Issuance of shares upon exercise of stock options - - 14,400 2 --------- ------ ---------- -------- Balance as of December 31, 1999 - - 13,026,336 2,064 Comprehensive income (loss): Net income - - - - Foreign currency translation adjustments - - - - Total comprehensive income Issuance of shares upon acquisition of - - 1,500,000 186 Flagship Issuance of shares upon exercise of warrants - - 119,782 15 Issuance of shares upon exercise of stock options, net - - 45,786 8 --------- ------ ---------- -------- Balance as of December 31, 2000 - $ - 14,691,904 $ 2,273 ========= ====== ========== ========
ACCUMULATED ADDITIONAL OTHER TOTAL PAID-IN COMPREHENSIVE ACCUMULATED SHAREHOLDERS' CAPITAL LOSS DEFICIT EQUITY ---------- ------- --------- --------- Balance as of January 1, 1998 $ 19,707 $ (246) $ (18,107) $ 2,640 Comprehensive income (loss): Net income - - 4,552 4,552 Foreign currency translation adjustments - (496) - (496) --------- Total comprehensive income 4,056 ========= Issuance of Ordinary shares, net 18,892 - - 19,350 Exercise of over-allotment 637 - - 651 Conversion of Preferred shares into Ordinary shares - - - - ---------- ------- --------- --------- Balance as of December 31, 1998 39,236 (742) (13,555) 26,697 Comprehensive loss: Net loss - - (3,778) (3,778) Foreign currency translation adjustments - (424) - (424) --------- Total comprehensive loss (4,202) ========= Issuance of Ordinary shares, net 10,736 - - 10,982 Issuance of shares upon exercise of warrants 1,861 - - 1,919 Issuance of shares upon exercise of stock options 70 - - 72 ---------- ------- --------- --------- Balance as of December 31, 1999 51,903 (1,166) (17,333) 35,468 Comprehensive income (loss): Net income - - 2,359 2,359 Foreign currency translation adjustments - (618) - (618) --------- Total comprehensive income 1,741 ========= Issuance of shares upon acquisition of 8,889 - - 9,075 Flagship Issuance of shares upon exercise of warrants - - - 15 Issuance of shares upon exercise of stock options, net 162 - - 170 ---------- ------- --------- --------- Balance as of December 31, 2000 $ 60,954 $(1,784) $ (14,974) $ 46,469 ========== ======= ========= =========
The accompanying notes are an integral part of the consolidated financial statements. F - 6 88 PARADIGM GEOPHYSICAL LTD. AND ITS SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS - -------------------------------------------------------------------------------- U.S. DOLLARS IN THOUSANDS
YEAR ENDED DECEMBER 31, ---------------------------------------------- 1998 1999 2000 --------- ---------- ------- Cash flows from operating activities: Net income (loss) $ 4,552 $ (3,778) $ 2,359 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization 4,778 6,929 8,106 Impairment of development technology - 1,595 - Decrease (increase) in trade receivables, accrued income and long-term trade receivables (5,035) (8,866) 10,081 Decrease (increase) in other receivables and prepaid expenses 1,432 (98) 441 Increase (decrease) in deferred income tax assets and liabilities, net (202) 203 (171) Decrease (increase) in other assets - 84 - Increase (decrease) in trade and other payables and accrued expenses (5,384) 1,795 (4,561) Increase (decrease) in deferred revenues (1,929) 1,004 (2,522) Accrued severance pay, net 15 243 (1,083) Other - - (22) --------- ---------- ------- Net cash provided by (used in) operating activities *(1,773) *(889) 12,628 --------- ---------- ------- Cash flows from investing activities: Purchase of property and equipment (4,516) (5,847) (5,331) Proceeds from sale of property and equipment - - 39 Purchase of developed technology - (1,175) (170) Payment for acquisition of a consolidated subsidiary, PTM (1) - (8,379) - Payment for acquisition of a consolidated subsidiary, Flagship (2) - - (3,980) --------- ---------- ------- Net cash used in investing activities (4,516) (15,401) (9,442) --------- ---------- ------- Cash flows from financing activities: Proceeds from short-term bank loans *1,584 *2,000 7,506 Principal payment of short-term bank loans *(517) *(1,778) (4,978) Principal payment of note payable (8,457) - - Principal payments of capital lease obligations - (200) (424) Proceeds from long-term loans - 6,500 - Principal payment of long-term loans (571) (427) (2,173) Principal payment of bridge loan (12,000) - - Payment of other lease obligations - (200) (242) Issuance of share capital, net 21,160 10,982 - Proceeds from exercise of warrants and stock options - 1,991 185 Amortization of debt issuance costs from warrants issued 475 - - --------- ---------- ------- Net cash provided by financing activities *1,674 *18,868 (126) --------- ---------- ------- Effect of exchange rate changes on cash and cash equivalents (151) (584) 130 --------- ---------- ------- Increase (decrease) in cash and cash equivalents (4,766) 1,994 3,190 Cash and cash equivalents at the beginning of the year 8,229 3,463 5,457 --------- ---------- ------- Cash and cash equivalents at the end of the year $ 3,463 $ 5,457 $ 8,647 ========= ========= =======
* Reclassified The accompanying notes are an integral part of the consolidated financial statements. F - 7 89 PARADIGM GEOPHYSICAL LTD. AND ITS SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS - -------------------------------------------------------------------------------- U.S. DOLLARS IN THOUSANDS
YEAR ENDED DECEMBER 31, ----------------------------------------- 1998 1999 2000 -------- -------- -------- (1) Payment for acquisition of a consolidated subsidiary, PTM: Estimated fair values of assets acquired and liabilities assumed at the date of acquisition: Working capital deficiency, excluding cash and cash equivalents $ -- $ (672) $ -- Property and equipment -- 318 -- Acquired technology -- 5,146 -- Assembled work-force -- 851 -- Goodwill -- 2,736 -- -------- -------- -------- $ -- $ 8,379 $ -- ======== ======== ======== (2) Payment for acquisition of a consolidated subsidiary, Flagship: Estimated fair values of assets acquired and liabilities assumed at the date of acquisition: Working capital deficiency, excluding cash and cash equivalents $ -- $ -- $ (1,014) Property and equipment -- -- 743 Acquired technology -- -- 3,430 Assembled work-force -- -- 1,180 Customer base -- -- 2,410 Goodwill -- -- 7,056 -------- -------- -------- -- -- 13,805 Less - amount financed by issuance of shares, net -- -- (9,075) Less - accrued prepaid acquisition expenses -- -- (750) -------- -------- -------- $ -- $ -- $ 3,980 ======== ======== ======== Supplemental disclosure of cash flow activities: Cash paid during the year for: Interest $ 721 $ 42 $ 949 ======== ======== ======== Income taxes $ -- $ 379 $ -- ======== ======== ======== Non-cash activities: Purchase of leased property and equipment in a capital lease $ 863 $ 1,376 $ -- ======== ======== ======== Offering expenses $ 1,159 $ -- $ -- ======== ======== ======== Write-off of note payable in connection with an acquisition of a consolidated subsidiary in 1997, as a result of reevaluation of certain assets purchased $ 1,043 $ -- $ -- ======== ======== ======== Additional acquired technology associated with an acquisition of a consolidated subsidiary in 1997 $ 2,343 $ -- $ -- ======== ======== ======== Conversion of Preferred shares into Ordinary shares $ 765 $ -- $ -- ======== ======== ======== Accrued prepaid acquisition expenses associated with the Flagship acquisition $ -- $ -- $ 750 ====== ====== ========
The accompanying notes are an integral part of the consolidated financial statements. F - 8 90 PARADIGM GEOPHYSICAL LTD. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE 1:- BUSINESS AND ORGANIZATION a. General: Paradigm Geophysical Ltd. ("Paradigm" or the "Company") was incorporated under the laws of Israel. The Company provides Geoscience knowledge solutions for the oil and gas industry which facilitate the exploration and development of oil and gas reserves. Paradigm provides exploration and production Geoscience software solutions, technical training, data processing, interpretation and reservoir-studies services, adding value to the oil and gas industry's reservoir assets. Paradigm operates worldwide through wholly-owned subsidiaries in the United States, Canada, Venezuela, Argentina, Brazil, the Netherlands, United Kingdom, France, Australia, Indonesia and Singapore and through representative offices in Russia, Bahrain and China. These subsidiaries and representative offices coordinate the activities of the Company's direct sales force and its network of representative agents in the Far East, Near East, Pacific Rim, Africa and South America. The Company's global sales, users' support and services network serves all major oil-and gas-producing companies in the world. b. Acquisition of Flagship: On October 4, 2000, the Company acquired all assets and assumed all liabilities of Flagship S.A., a France based company, and Flagship LLC, a U.S. based company (together "Flagship"), wholly owned subsidiaries of Compagnie Generale de Geophysique ("CGG"). Flagship products provide structural geological interpretation and reservoir characterization. The total consideration of the acquisition was $ 14,219,000 (including $ 1,055,000 of costs related to the acquisition), which was financed by an issuance of 1,500,000 Ordinary shares of the Company in the total amount of $ 9,075,000 (net of $ 89,000 issuance expenses) and $ 5,055,000 in cash (of which $ 4,305,000 was paid and $ 750,000 was recorded as accrued expenses as of December 31, 2000). The transaction has been accounted for using the purchase method of accounting, and accordingly, the purchase price has been allocated to the assets acquired and liabilities assumed based upon their fair values. The excess of the purchase price over the fair value of the tangible assets acquired and liabilities assumed has been allocated to identifiable intangible assets including acquired technology, assembled work-force, customer base and goodwill, as follows (in thousands): Acquired technology $ 3,430 Assembled work-force 1,180 Customer base 2,410 Goodwill 7,056 ---------- Total $ 14,076 ==========
F - 9 91 PARADIGM GEOPHYSICAL LTD. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- The acquired assembled work-force and the acquired technology are being amortized over their expected useful period, which is estimated at ten years, customer base and goodwill are being amortized over a twenty years period. The financial statements of Flagship were consolidated with the accounts of the Company, commencing October 4, 2000. The following represents the unaudited pro-forma results of operations for the years ended December 31, 1999 and 2000, assuming that the Flagship acquisition had been consummated as of January 1, 1999 and January 1, 2000:
DECEMBER 31, ----------------------------- 1999 2000 ---------- ---------- IN THOUSANDS, EXCEPT PER SHARE DATA Revenues $ 72,514 $ 75,033 ========== ========== Net income (loss) $ (5,359) $ 457 ========== ========== Basic net earnings (loss) per share $ (0.39) $ 0.03 ========== ========== Diluted net earnings (loss) per share $ (0.39) $ 0.03 ========== ==========
c. Acquisition of PTM: On March 31, 1999, Paradigm acquired the net assets of the Petroleum Technology Division of Mincom Limited ("PTM"), an Australian entity for $ 8,379,000 in cash, including $ 317,000 acquisition costs. PTM's is the developer of the Geolog product, which is an information software tool for log analysis and petrophysics. The acquisition has been accounted for using the purchase method of accounting, and accordingly, the purchase price has been allocated to the assets acquired and liabilities assumed, based upon their fair values. The excess of the purchase price over the fair value of the tangible assets acquired and liabilities assumed has been allocated to identifiable intangible assets including acquired technology, assembled work-force and goodwill, as follows (in thousands): Acquired technology $ 5,146 Assembled work-force 851 Goodwill 2,736 ------- $ 8,733 =======
F - 10 92 PARADIGM GEOPHYSICAL LTD. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- The acquired assembled work-force and the acquired technology are being amortized over their expected useful period which is estimated at ten years, goodwill is being amortized over a twenty years period. In prior years, goodwill has been amortized over a ten years period (see Note 5c). The financial statements of PTM were consolidated with the accounts of the Company, commencing March 31, 1999. The following are pro-forma unaudited results of operations for the years ended December 31, 1998 and 1999, assuming that the PTM acquisition had been consummated as of January 1, 1998 and January 1, 1999:
DECEMBER 31, ------------ 1998 1999 ---- ---- IN THOUSANDS, EXCEPT PER SHARE DATA --------------------- Revenues $ 51,337 $ 56,105 ======== ======== Net income (loss) $ 4,190 $ (3,867) ======== ======== Basic net earnings (loss) per share $ 0.61 $ (0.32) ======== ======== Diluted net earnings (loss) per share $ 0.45 $ (0.32) ======== ========
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States ("U.S. GAAP"). a. Use of estimates: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. b. Financial statements in U.S. dollars: A majority of the Company's revenues is generated in U.S. dollars ("dollar"). In addition, a substantial portion of its costs is incurred in dollars. Since the dollar is the primary currency in the economic environment in which the Company operates, the dollar is its functional and reporting currency. Accordingly, monetary accounts maintained in currencies other than the dollar are remeasured into U.S. dollars in accordance with Statement of Financial Accounting Standards ("SFAS") 52, "Foreign Currency Translation". All transactions gains and losses from remeasurement of monetary balance sheet items are reflected in the consolidated statements of operations as financial income or expenses, as appropriate. F-11 93 PARADIGM GEOPHYSICAL LTD. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- Total foreign currency translation net income (expenses) amounted to $ 313,000, $ (6,000) and $ (53,000) for the years ended December 31, 1998, 1999 and 2000, respectively. The functional and reporting currency of all subsidiaries has been determined to be their local currency. For those subsidiaries assets and liabilities are translated at year-end exchange rate and statement of operations items are translated at the average rates prevailing during the year. These translation adjustments are recorded as accumulated other comprehensive income (loss), in shareholders' equity. c. Principles of consolidation: The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. Intercompany balances and transactions have been eliminated upon consolidation. d. Cash equivalents: Cash equivalents are short-term highly liquid investments that are readily convertible to cash with original maturities of three months or less. e. Property and Equipment: Property and equipment are stated at cost, net of accumulated depreciation. Depreciation is calculated by the straight-line method over the estimated useful lives of the assets at the following annual rates:
% -------------------------- Computers and peripheral equipment 20 - 33 Office furniture and equipment 6 - 15 Motor vehicles 15 Leasehold improvements over the term of the lease
The Company and its subsidiaries periodically assess the recoverability of the carrying amount of property and equipment and provide for any possible impairment loss based upon the difference between the carrying amount and fair value of such assets in accordance with SFAS No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of". As of December 31, 2000, no impairment losses have been identified. f. Other assets: Other assets include goodwill, developed technology and other identified intangibles and are stated at amortized cost. Amortization is calculated using the straight-line method over their estimated useful life, which ranges from five to twenty years. F-12 94 PARADIGM GEOPHYSICAL LTD. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- The carrying value of intangible assets is periodically reviewed by management, based on the expected future undiscounted operating cash flows over the remaining amortization period. If this review indicates that the intangible assets will not be recoverable, the carrying value of the intangible assets is reduced to estimated fair value. In 1999, following the PTM acquisition such impairment was indicated, and the Company recognized an impairment loss in the amount of $ 1,595,000 related to developed technology. In 2000 the Company did not recognize an impairment loss in relation to intangible assets. g. Revenue recognition: The Company and its subsidiaries generate revenues mainly from licensing the rights to use its software products, from software licenses that require significant customization, from consulting services and from sales of professional services of seismic data processing, interpretation and reservoir-studies services. The Company and its subsidiaries also generate revenues from maintenance and support, training, installation and hardware sales. The Company and its subsidiaries sell their products primarily through their direct sales force. The Company and its subsidiaries implement Statement of Position (SOP) 97-2, "Software Revenue Recognition", as amended. Revenues from software arrangements are recognized upon delivery of the product, when collection is probable, the product fee is otherwise fixed or determinable and persuasive evidence of an arrangement exists. SOP 97-2 requires revenue earned on software arrangements involving multiple elements to be allocated to each element based on the relative fair value of the elements. The Company has also adopted SOP 98-9, "Modification of SOP 97-2, Software Revenue Recognition with Respect to Certain Transactions," for all transactions entered into after January 1, 2000. The Company's Vendor Specific Objective Evidence ("VSOE") used to allocate the sales price to maintenance, support, training and installation is based on the price charged when these elements are sold separately. SOP 98-9 requires that revenue be recognized under the "residual method" when (1) VSOE of fair value exists for all undelivered elements and no VSOE exists for the delivered elements, and (2) all revenue recognition criteria of SOP 97-2, as amended, are satisfied. Under the residual method any discount in the arrangement is allocated to the delivered element. The Company does not grant a right of return to its customers. Maintenance and support revenue included in multiple element arrangements is deferred and recognized on a straight-line basis over the term of the maintenance and support agreement. Revenues from training and installation included in multiple element arrangement and from consulting services are recognized at the time they are rendered. Revenues from hardware sales are recognized when persuasive evidence of an agreement exists, delivery has occurred, the fee is fixed or determinable and collectibility is probable. F-13 95 PARADIGM GEOPHYSICAL LTD. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- Revenues from software licenses that require significant customization and from seismic data processing, interpretation and reservoir-studies services are recognized based on SOP 81-1 "Accounting for Performance of Construction Type and Certain Production Type Contracts", using contract accounting on a percentage of completion method. The percentage of completion for software licenses arrangements that require significant customization is determined based on the relationship of actual costs incurred to total costs estimated to be incurred over the duration of the contract. The percentage of completion for seismic data processing, interpretation and reservoir-studies services is determined based on the amount of data interpreted or processed to the total amount of data to be interpreted or processed. A provision for estimated losses on uncompleted contracts is recorded in the period in which such losses are first identified, in the amount of the estimated loss on the entire contract. As of December 31, 2000 no provision for losses have been recorded. Deferred revenue includes unearned amounts received under maintenance and support contracts, and amounts received from customers but not recognized as revenues. In December 1999, the SEC issued Staff Accounting Bulletin No. 101 (SAB 101) "Revenue Recognition in Financial Statements" as amended in June 2000, which summarizes the Staff's views in applying generally accepted accounting principles to revenue recognition in financial statements. The Company adopted SAB 101 during the fourth quarter of 2000. The adoption did not have a significant effect on the Company's consolidated results of operations or financial position. h. Research and development costs: Research and development costs incurred in the process of developing product improvements or new products, are generally charged to expenses as incurred, net of participation of the Office of the Chief Scientist in the Israeli Ministry of Industry and Trade. Statement of Financial Accounting Standards ("SFAS") No. 86 "Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed", requires capitalization of certain software development costs subsequent to the establishment of technological feasibility. Based on the Company and its subsidiaries product development process, technological feasibility is established upon completion of a working model. Costs incurred by the Company and its subsidiaries between completion of the working model and the point at which the product is ready for general release which are insignificant, have been capitalized. Capitalized software costs are amortized by the greater of the amount computed using the (i) ratio that current gross revenues from sales of the software to the total of current and anticipated future gross revenues from sales of that software, or (ii) the straight-line method over the estimated useful life of the product (three to five years). The Company assesses the recoverability of this intangible asset on a regular basis by determining whether the amortization of the asset over its remaining life can be recovered through undiscounted future operating cash flows from the specific software product sold. F-14 96 PARADIGM GEOPHYSICAL LTD. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- i. Income taxes: The Company and its subsidiaries accounts for income taxes in accordance with Statement of Financial Accounting Standards ("SFAS") 109, "Accounting for Income Taxes". This Statement prescribes the use of the liability method whereby deferred tax assets and liability account balances are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. The Company and its subsidiaries provide a valuation allowance, if necessary, to reduce deferred tax assets to their estimated realizable value. j. Concentrations of credit risks: Financial instruments that potentially subject the Company and its subsidiaries to concentrations of credit risk consist principally of cash and cash equivalents, trade receivables, long term receivables and accrued income. Cash and cash equivalents are invested in U.S. dollars with major banks in the United States, France and in Israel. Such investments in the United States may be in excess of insured limits and are not insured in other jurisdictions. Management believes that the financial institutions that hold the Company's investments are financially sound and, accordingly, minimal credit risk exists with respect to these investments. The Company's trade receivables, long-term receivables and accrued income are generally derived from sales of products and services rendered to large and solid organizations located primarily in Europe, the Middle East and Asia ("EMEA"), the United States, and the Far East. The Company performs ongoing credit evaluations of its customers. An allowance for doubtful accounts is determined with respect to those amounts that the Company has determined to be doubtful of collection, and to date the Company has not incurred significant loss. The Company and its subsidiaries have no significant off-balance-sheet concentration of credit risk such as foreign exchange contracts, option contracts or other foreign hedging arrangements. F-15 97 k. Accounting for stock-based compensation: The Company has elected to follow Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued to Employees" ("APB 25") and Interpretation No. 44 "Accounting for Certain Transactions Involving Stock Compensation" ("FIN 44") in accounting for its employee stock option plans. Under APB 25, when the exercise price of the Company's share options is less than the market price of the underlying shares on the date of grant, compensation expense is recognized. The pro forma disclosures required by SFAS No. 123 "Accounting for Stock-Based Compensation" ("SFAS 123"), are provided in Note 8f. l. Severance pay: The Company's liability for severance pay is calculated pursuant to Israeli severance pay law based on the most recent salary of the employees multiplied by the number of years of employment, as of the balance sheet date. Israeli employees are entitled to one month's salary for each year of employment or a portion thereof. The Company's liability for all of its employees, is fully provided by monthly deposits with severance pay funds, insurance policies and by an accrual. The deposited funds include profits accumulated up to the balance sheet date. The deposited funds may be withdrawn only upon the fulfillment of the Company's obligation pursuant to Israeli severance pay law and labor agreements. The value of the deposited funds is based on the cash surrendered value of these policies, and includes immaterial profits. m. Fair value of financial instruments: The following methods and assumptions were used by the Company in estimating their fair value disclosures for financial instruments: The carrying amounts of cash and cash equivalents, trade receivables, short-term bank loans and trade payables approximate their fair value due to the short-term maturity of such instruments. Long-term trade receivables, long-term bank loans and lease obligations are estimated by discounting the future cash flows using current interest rates for borrowings and lending of similar terms and maturities. The carrying amount of the long-term trade receivables, long-term bank loans and lease obligations approximates their fair value. n. Advertising expenses: Advertising expenses are charged to the statements of operations as incurred. Advertising expenses for the years ended December 31, 1998, 1999 and 2000 were $ 419,000, $ 587,000 and $ 536,000, respectively. F-16 98 PARADIGM GEOPHYSICAL LTD. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- o. Basic and diluted net earnings (loss) per share: Basic net earnings (loss) per share is computed based on the weighted average number of Ordinary shares outstanding during each year. Diluted net earnings per share is computed based on the weighted average number of Ordinary shares outstanding during each year, plus dilutive potential Ordinary shares considered outstanding during the year, in accordance with Statement of Financial Accounting Standards ("SFAS") 128, "Earnings Per Share". The total number of shares related to outstanding options and warrants excluded from the calculation of diluted net earnings (loss) per share, because these securities are anti-dilutive, was 0, 46,000 and 1,230,590 for the years ended December 31, 1998, 1999 and 2000, respectively. p. Impact of recently issued accounting standards: The Financial Accounting Standards Board issued SFAS No. 133 ("SFAS 133"), "Accounting for Derivative Instruments and Hedging Activities" ("SFAS No. 133") in June 1999 and its amendments, statements 137 and 138, in June 1999 and June 2000, respectively. These statements establish accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded on the balance sheet as either an asset or liability measured at its fair value. These statements also require that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows a derivative's gains and losses to offset related results on the hedged item in the income statement, and requires that a company must formally document, designate, and assess the effectiveness of transactions that receive hedge accounting. The FASB has issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities-Deferral of the Effective Date of FASB Statement No. 133". The Statement defers for one year the effective date of SFAS No. 133. The rule will apply to all fiscal quarters of all fiscal years beginning after June 15, 2000. The Company does not expect the impact of this new statement on the Company's consolidated balance sheets or results of operations to be material. q. Reclassification: Certain prior years amounts have been reclassified to conform to the current year's presentation. F-17 99 PARADIGM GEOPHYSICAL LTD. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE 3:- OTHER RECEIVABLES AND PREPAID EXPENSES
DECEMBER 31, ------------ 1999 2000 ---- ---- U.S. DOLLARS IN THOUSANDS ------------------------- Government authorities $ 274 $ 495 Prepaid expenses 777 1,350 Other (1) 1,392 2,265 -------- -------- $ 2,443 $ 4,110 ======== ========
(1) Includes two loans to the Company's officer, one in March 1999 and the second in July 1999. The loans are amounted to $ 110,000, linked to the Israeli Consumer Price Index, with interest at the rate of 2% per annum until May 31, 2000 and 4% per annum from June 1, 2000. These loans were originally repayable on December 31, 2000, but repayment has been extended to December 31, 2001. NOTE 4:- PROPERTY AND EQUIPMENT, NET a. Comprised as follows:
DECEMBER 31, ------------ 1999 2000 ---- ---- U.S. DOLLARS IN THOUSANDS ------------------------- Cost: Computers and peripheral equipment $17,130 $26,180 Office furniture and equipment 1,925 2,604 Motor vehicles 173 48 Leasehold improvements 2,382 3,301 ------- ------- 21,610 32,133 ------- ------- Accumulated depreciation 9,603 18,815 ------- ------- Depreciated cost $12,007 $13,318 ======= =======
b. Depreciation expenses amounted to $ 2,298,000, $ 3,865,000 and $ 4,746,000 for the years ended December 31, 1998, 1999 and 2000, respectively. c. The equipment acquired under capital lease in accordance with Statement of Financial Accounting Standards ("SFAS") 13, "Accounting for Leases", in the amount of $ 1,300,000 is included in property and equipment. Depreciation expense relating to this equipment was approximately $ 115,000 and $ 275,000 for the years ended December 31, 1999 and 2000, respectively (see also Note 10c). d. As for charges, see Note 10e. F-18 100 PARADIGM GEOPHYSICAL LTD. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE 5: - OTHER ASSETS, NET a. Comprised as follows:
DECEMBER 31, ------------ 1999 2000 ---- ---- U.S. DOLLARS IN THOUSANDS ------------------------- Acquired technology (net of accumulated amortization of $ 1,490 in 1999 and $ 3,724 in 2000) $ 9,805 $ 11,171 Assembled work-force (net of accumulated amortization of $ 644 in 1999 and $ 1,012 in 2000) 1,595 2,408 Computer software development costs (net of accumulated amortization of $ 1,545 in 1999 and $ 1,720 in 2000) 175 -- Customer base (net of accumulated amortization of $ 0 in 1999 and $ 30 in 2000) -- 2,380 Goodwill (net of accumulated amortization of $ 527 in 1999 and $ 992 in 2000) 2,909 9,499 Other (net of accumulated amortization of $ 0 in 1999 and $ 88 in 2000) 235 147 -------- -------- $ 14,719 $ 25,605 ======== ========
b. Amortization expenses amounted to $ 2,347,000, $ 3,064,000 and $ 3,360,000 for the years ended December 31, 1998, 1999 and 2000, respectively. c. Effective October 1, 2000, the Company changed the estimated useful life of the remaining goodwill acquired in connection with the PTM acquisition from ten to twenty years. The effect of change of estimate on the net income and net earnings per share for the year ended December 31, 2000, has been immaterial. The expected effect of this change of estimate for the following eight years is an increase of approximately $ 200,000, and $0.01 on net income and on net earnings per share per annum, respectively. NOTE 6: - OTHER PAYABLES AND ACCRUED EXPENSES
DECEMBER 31, ------------ 1999 2000 ---- ---- U.S. DOLLARS IN THOUSANDS ------------------------- Accrued expenses $ 2,195 $ 2,493 Employees and payroll accruals 2,583 2,585 Royalties 1,421 1,473 Employees termination expense 54 136 Income and other taxes 1,632 2,093 Other 907 1,151 ------- ------- $ 8,792 $ 9,931 ======= =======
F-19 101 PARADIGM GEOPHYSICAL LTD. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE 7:- FINANCING ARRANGEMENTS a. Short-term loans consist of bank loans. The interest rate on these borrowings is the London Inter Bank Offer Rate ("LIBOR") for three to six months, plus 1%. The weighted average interest rate as of December 31, 1999 and 2000, was approximately 6.5% and 7.5% respectively. b. Long-term loans represent other bank loans which are linked to the U.S. dollar. The interest rate on these borrowings is the LIBOR for three months, plus 1%. Aggregate maturities of long-term loans:
DECEMBER 31, ------------ 1999 2000 ---- ---- U.S. DOLLARS IN THOUSANDS ------------------------- First year (current maturities) $ 2,639 $ 3,112 Second year 3,145 1,277 Third year 778 -- ------- ------- $ 6,562 $ 4,389 ======= =======
c. In 2000, the Company increased its credit arrangements and now has authorized short- and long-term credit lines in the amount of approximately $ 20 million (there is no fee for the unused portion of the credit facilities). This amount includes its bank loans as of December 31, 2000, of approximately $ 9 million, and the remaining $ 11 million can be used as either short-term or long-term debt. NOTE 8:- SHARE CAPITAL a. Ordinary shares: Ordinary shares confer upon their holders voting rights, the right to receive cash dividends, and the right to a share in excess assets upon liquidation of the Company. b. Preferred shares: All the issued and outstanding Preferred shares were automatically converted into Ordinary shares at the time of the Company's Initial Public Offering ("IPO"), which took place in 1998. Since then, the Ordinary shares have been traded on NASDAQ in U.S. c. In October 2000, the Company issued 1,500,000 shares to CGG as part of the consideration in regarding to the Flagship acquisition (see Note 1b). d. In April and May 1999, the Company completed through a private placement, a share issuance of 2,017,544 Ordinary shares to new and existing investors, and raised approximately $ 11 million. F-20 102 PARADIGM GEOPHYSICAL LTD. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- e. Stock options: Under the Company's 1994 and 1997 Stock Option Plans ("the Plans"), options may be granted to employees, officers, directors and consultants who provide services to the Company or any subsidiary. Pursuant to the Plans, a total of 2,300,000 Ordinary shares of the Company are reserved for issuance. Options granted under the 1994 and 1997 Plans, if unexercised, expire ten and eight years from the date of grant, respectively. The exercise price of these options may not be less than 100% of the market price of the share at the date of grant. Options granted under the Plans are generally exercisable in installments over the vesting period. Options which are canceled or forfeited before expiration become available for future grants. Total amount of options available for future grants as of December 31, 2000 amounted to 394,658. The following is a summary of the options granted among the various Plans.
YEAR ENDED DECEMBER 31, ----------------------------------------------------------------------------------------- 1998 1999 2000 ---- ---- ---- WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE EXERCISE EXERCISE EXERCISE NUMBER PRICE NUMBER PRICE NUMBER PRICE ------ ----- ------ ----- ------ ----- Outstanding at the beginning of the year 1,043,104 $ 4.88 1,592,616 $ 5.65 1,603,216 $ 5.67 Granted 629,000 $ 7.00 121,500 $ 7 598,350 $ 7 Canceled or forfeited (79,488) $ 6.31 (96,500) $ 7 (310,624) $ 6.49 Exercised -- -- (14,400) $ 5 (45,786) $ 3.84 ---------- ------- ---------- ------ ---------- ------- Outstanding at the end of the year 1,592,616 $ 5.65 1,603,216 $ 5.67 1,845,156 $ 6.01 ========== ======= ========== ====== ========== ======= Exercisable at the end of the year 644,430 $ 5.15 1,013,064 $ 5.18 1,079,435 $ 5.31 ========== ======= ========== ====== ========== =======
The options outstanding as of December 31, 2000, have been separated into ranges of exercise price as follows:
WEIGHTED OPTIONS WEIGHTED OPTIONS AVERAGE OUTSTANDING AVERAGE WEIGHTED EXERCISABLE EXERCISE RANGE OF AS OF REMAINING AVERAGE AS OF PRICE OF EXERCISE DECEMBER 31, CONTRACTUAL EXERCISE DECEMBER 31, OPTIONS PRICE 2000 LIFE (YEARS) PRICE 2000 EXERCISABLE ----- ---- ------------ ----- ---- ----------- $ 0.59 63,336 1.33 $ 0.59 63,336 $ 0.59 $ 2.50 89,190 1.33 $ 2.50 89,190 $ 2.50 $ 4.00-6.00 462,040 4.05 $ 4.80 461,232 $ 4.80 $ 7.00 1,230,590 5.99 $ 7.00 465,677 $ 7.00 --------- ------ ------- ------ 1,845,156 $ 6.01 1,079,435 $ 5.31 ========= ====== ========= ======
F-21 103 PARADIGM GEOPHYSICAL LTD. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- In June 1998, the Company re-priced certain options to an exercise price of $ 7, the fair market value at the date of the re-pricing, following which the exercise price of the options outstanding as of December 31, 2000 was between $ 0.59 and $ 7. f. Pro-forma information regarding net income and net earnings per share is required by SFAS No. 123, and has been determined as if the Company had accounted for its employee stock options under the fair value method of that Statement. The fair value for these options was estimated at the grant date using a Black and Scholes option pricing model with the following weighted-average assumptions for each of the three years in the period ended December 31, 1998, 1999 and 2000, respectively: risk-free interest rates of 6% for each year; dividend yields of 0% for each year; a volatility factor of the expected market price of the Company's Ordinary shares of 0.5-0.561, 0.567 and 0.621; a weighted-average expected life of the option of eight years for each year. The Black and Scholes option valuation model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions, including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. The weighted average fair value of the options at their dates of grant in 1998, 1999 and 2000 was $ 3.99, $ 4.38 and $ 4.82, respectively. All options were granted with an exercise price equal to the fair market value at the date of grant. Pro-forma information under SFAS No. 123 (in thousands, except per share data):
YEAR ENDED DECEMBER 31, ----------------------- 1998 1999 2000 ---- ---- ---- Net income (loss) as reported $ 4,552 $ (3,778) $ 2,359 ========= ========= ========= Pro-forma net income (loss) $ 3,488 $ (5,035) $ 744 ========= ========= ========= Pro-forma basic net earnings (loss) per share $ 0.51 $ (0.41) $ 0.06 ========= ========= ========= Pro-forma diluted net earnings (loss) per share $ 0.37 $ (0.41) $ 0.06 ========= ========= =========
Because SFAS No. 123 is applicable only to stock options granted subsequent to December 31, 1994, its pro-forma effect will not be fully realized until the year 2004. F-22 104 PARADIGM GEOPHYSICAL LTD. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- g. Warrants: In October 1997, the Company issued 720,000 warrants in connection with bridge loans received in relation to the acquisition of CogniSeis Development Inc. ("CogniSeis"), at an exercise price of $ 6.00 per Ordinary share. These warrants are exercisable over seven years. The fair value of these warrants was estimated using a Black and Scholes option pricing model with the following weighted-average assumptions: risk-free interest rate of 6%; dividend yields of 0%; a volatility factor of the expected market price of the Company's Ordinary shares of 0.285; and a weighted-average expected life of the warrants of one year. The fair value of these warrants in the amount of $ 600,000 was amortized as additional interest expense in 1997 and 1998, amounting to $ 125,000 and $ 475,000, respectively. In April 2000, 360,000 warrants were exercised to 119,782 of the Company's Ordinary shares at an exercise price equal to the par value of NIS 0.5, due to a cashless exercise mechanism. In 1999, as compensation for services provided to the Company in connection with the share issuance (see d), investment bankers received 250,000 warrants exercisable during a three year period at an exercise price of $ 5.70 per Ordinary share. As of December 31, 2000, 250,000 warrants are exercisable. h. Dividends: Dividends, if any, will be paid in NIS. Dividends paid to shareholders outside Israel may be converted to U.S. dollars on the basis of the exchange rate prevailing at the date of the conversion. The Company does not intend to pay cash dividends in the foreseeable future. NOTE 9:- INCOME TAXES a. Measurement of taxable income under the Income Tax (Inflationary Adjustments) Law, 1985: Results for tax purposes are measured in terms of earnings in NIS after certain adjustments for increases in the Israeli Consumer Price Index ("CPI"). As explained in Note 2b, the financial statements are measured in U.S. dollars. The difference between the annual change in the Israeli CPI and in the NIS/dollar exchange rate causes a further difference between taxable income and the income before taxes shown in the financial statements. In accordance with paragraph 9(f) of SFAS No. 109, the Company has not provided deferred income taxes on the difference between the functional currency and the tax bases of assets and liabilities. b. Tax benefits under the Law for the Encouragement of Capital Investments, 1959: Four investment programs of the Company have been granted the status of an "Approved Enterprise". The Company's production facilities in Israel have been granted an "Approved Enterprise" status under the above law. The main benefit arising from such status is the reduction in tax rates on income derived from "Approved Enterprise". Consequently, the Company is entitled to two years of tax exempt and five years of reduced tax rate (25%). F-23 105 PARADIGM GEOPHYSICAL LTD. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- Additionally, the Company is a "foreign investors' company", as defined by that law and, as such, is entitled to additional reduction of the tax to 10% - 25% (based on the percentage of foreign ownership in each taxable year) and extension of three years of the benefit period. As the Company has no taxable income, the benefit periods have not yet commenced for all programs. The Company has completed implementation of three investment programs and currently implements the fourth investment program. The period of tax benefits, detailed above, is subject to limit of 12 years from the commencement of production, or 14 years from the approval date, whichever is earlier. Given the above mentioned conditions, under the various investment programs, the period of benefits for the production facilities will terminate in the years from 2002 thorough 2013. The entitlement to the above benefits is conditional upon the Company's fulfilling the conditions stipulated by the above law, regulations published thereunder and the instruments of approval for the specific investments in "Approved Enterprises". In the event of failure to comply with these conditions, the benefits may be canceled and the Company may be required to refund the amount of the benefits, in whole or in part, including interest. As of December 31, 2000, the Company is in compliance with all the conditions required by law. The tax-exempt income attributable to the "Approved Enterprise" can be distributed to shareholders without subjecting the Company to taxes only upon the complete liquidation of the Company. If these retained tax-exempt profits are distributed in a manner other than in the complete liquidation of the Company they would be taxed at the corporate tax rate applicable to such profits as if the Company had not elected the alternative system of benefits, currently between 10% - 25% for an "Approved Enterprise". As of December 31, 2000, the accumulated deficit of the Company does not include tax-exempt profits earned by the Company's "Approved Enterprise". Income from sources other than "Approved Enterprise" is taxed at the regular rate of 36%. c. Tax benefits under the Law for the Encouragement of Industry (Taxes), 1969: The Company is an "Industrial Company", as defined by this law and, as such, is entitled to certain tax benefits, mainly accelerated depreciation of machinery and equipment, as prescribed by regulations published under the Inflationary Adjustments Law, the right to claim public issuance expenses and amortization of patents and other intangible property rights as a deduction for tax purposes. F-24 106 PARADIGM GEOPHYSICAL LTD. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- d. Deferred income taxes: Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company and its subsidiaries deferred tax liabilities and assets are as follows:
DECEMBER 31, ------------ 1999 2000 ---- ---- U.S. DOLLARS IN THOUSANDS ------------------------- Deferred income tax assets: Operating loss carryforward $ 1,700 $ 1,200 Other -- 300 ------- ------- Net deferred income tax asset before valuation allowance 1,700 1,500 Valuation allowance (1,700) (1500) ------- ------- Net deferred income tax asset $ -- $ -- ======= ======= Deferred income tax liabilities: Amortization of acquired technology (foreign) $ 445 $ 273 ======= =======
The Company and its subsidiaries have provided valuation allowances in respect of deferred tax assets resulting from tax loss carryforwards and other differences. Management currently believes that since the Company and its subsidiaries have a history of losses it is more likely than not that the deferred tax regarding the loss carryforwards and other temporary differences will not be realized in the foreseeable future. During 2000, the Company decreased its valuation allowance by approximately $ 200,000. e. Net operating losses carryforwards: The Company has accumulated losses for tax purposes as of December 31, 2000, in the amount of approximately $ 6 million, which may be carried forward and offset against taxable income in the future for an indefinite period. Through December 31, 2000, the Company have accumulated losses for tax purposes in the amounts of approximately $ 2 million in the U.K. subsidiary, $ 1 million in the Australian subsidiary, and $ 0.3 million in other subsidiaries. These losses can be carried forward indefinitely. F-25 107 PARADIGM GEOPHYSICAL LTD. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- f. Reconciliation of the theoretical tax expense (benefit) to the actual tax expense (benefit): A reconciliation of the theoretical tax expense, assuming all income is taxed at the statutory rate applicable to income of the Company, and the actual tax expense are as follows (in thousands):
YEAR ENDED DECEMBER 31, ----------------------- 1998 1999 2000 ---- ---- ---- Theoretical tax (benefit) computed at the statutory rate of 36% $ 1,767 $(1,360) $ 986 Increase (decrease) in income taxes resulting from: Tax adjustment in respect of inflation in Israel (309) (710) (55) Non-deductible expenses 61 211 72 Carryforward losses for which a valuation allowance was provided -- -- (500) Losses for which benefits are not recognized 189 2,878 -- Prior year income tax (benefit) -- (258) -- Temporary differences -- -- (32) Accrued restructuring from 1997 (623) (180) -- Amortization of prior year's write-off of in-process research and development relating to CogniSeis acquisition (474) (474) (91) Amortization of deferred tax liabilities recorded upon acquisition of CogniSeis (255) (107) -- ------- ------- ----- Taxes on income expense $ 356 $ -- $ 380 ======= ======= =====
g. Income taxes consist of the following:
YEAR ENDED DECEMBER 31, ----------------------- 1998 1999 2000 ---- ---- ---- U.S. DOLLARS IN THOUSANDS ------------------------- Current $ 558 $ 725 $ 552 Deferred (202) (467) (172) Prior year -- (258) -- ----- ----- ----- $ 356 $ -- $ 380 ===== ===== ===== Domestic $ 137 $ -- $ 123 Foreign 219 -- 257 ----- ----- ----- $ 356 $ -- $ 380 ===== ===== =====
F-26 108 PARADIGM GEOPHYSICAL LTD. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- h. Income (loss) before income taxes from continued operation consists of the following:
YEAR ENDED DECEMBER 31, ----------------------- 1998 1999 2000 ---- ---- ---- U.S. DOLLARS IN THOUSANDS ------------------------- Domestic $ 2,412 $(3,255) $(13,948) Foreign 2,496 (523) 16,687 ------- ------- -------- $ 4,908 $(3,778) $ 2,739 ======= ======= ========
NOTE 10:- COMMITMENTS AND CONTINGENT LIABILITIES a. Royalty obligation to the Office of the Chief Scientist ("OCS") of the Government of Israel: Under the Company's research and development agreements with the OCS and pursuant to applicable laws, the Company is required to pay royalties at the rate of 3% of sales of products developed with funds provided by the Office of the Chief Scientist, up to an amount equal to 100% - 150% of the Office of the Chief Scientist's research and development grants (dollar-linked) related to such projects. The Company is obligated to repay the Government for the grants received only to the extent that there are sales of the funded product. The Company has paid or accrued royalties in the amounts of $ 400,000, $ 100,000 and $ 100,000 for the years ended December 31, 1998, 1999 and 2000, respectively, relating to the repayment of such grants. As of December 31, 2000, the Company had a contingent obligation to pay royalties in the amount of approximately $ 603,000. b. Royalty obligation to the Marketing Fund of the Government of Israel: The Israeli Government, through the Fund for the Encouragement of Marketing Activities, awarded the Company grants for participation in foreign marketing expenses. The Company is committed to pay royalties at the rate of 3% of the increase in foreign sales. Total royalties are not to exceed the amounts of grants received by the Company (dollar-linked). The Company did not receive grants for the years ended December 31, 1998, 1999 and 2000. The Company has paid or accrued royalties in the amounts of $ 49,000, $0 and $0 for the years ended December 31, 1998, 1999 and 2000, respectively, relating to the repayment of such grants. As of December 31, 2000, the Company had a contingent obligation to pay royalties in the amount of approximately $ 418,000. F-27 109 PARADIGM GEOPHYSICAL LTD. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- c. Leases: The Company and its subsidiaries rent their offices under various operating lease agreements, which expire on various dates. The rental fees are partly linked to the dollar and partly to the Israeli Consumer Price Index. In August 1999, the Company entered into a three years lease agreement to acquire computer equipment, which has been recorded as a capital lease in accordance with SFAS No. 13 "Accounting for Leases". Future minimum rental commitments under non-cancelable operating and capital leases as of December 31, 2000, are as follows (in thousands):
OPERATING CAPITAL YEAR ENDED DECEMBER 31, LEASES LEASES ------ ------ 2001 $ 2,821 $ 600 2002 2,899 267 2003 2,925 -- 2004 2,603 -- 2005 and thereafter 6,032 -- -------- ---- Total minimum lease payments $ 17,281 867 ======== Less - amount representing interest (115) ---- Present value of capital lease obligation 752 Less - current portion 546 ---- Long-term portion $ 206 ====
Total rent expenses for the years ended December 31, 1998, 1999 and 2000, amounted to $ 1,753,000, $ 2,020,000 and $ 2,930,000, respectively. d. Legal: Geophysical Micro Computer Application (international) Ltd. ("GMA") is appealing a final judgment entered by the trial court in the matter of Paradigm Geophysical Micro Computer Application (international) Ltd. On December 11, 1997, the Company filed a lawsuit for a declaratory judgment to determine whether it has any obligation to GMA under a letter of intent (the "letter of intent"). Under the terms of the letter of intent, the company and GMA contemplated a transaction in which GMA would purchase certain computer software programs and related products ("SeisX") from the Company, provided that the Company acquired the SeisX assets from a third party. On May 5, 1998, GMA filed a counterclaim for breach of contract, claiming that the letter of intent required the Company to sell SeisX to GMA. GMA sought compensatory, injunctive F-28 110 PARADIGM GEOPHYSICAL LTD. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- and declaratory relief. On September 11, 1998, the trial court granted summary judgment in favor of the Company and declared that the Company has no obligation to sell the SeisX assets or related products to GMA, and that GMA lost its counterclaim. On December 7, 1998, GMA filed the above-referenced appeal, which has not yet been heard by the court, although briefing has been complete. The Company's management and the legal advisers of the Company believe that the outcome of the above claim will not have an adverse effect on the Company's consolidated financial statements. Accordingly, no provision has been recorded in the consolidated financial statements. e. Charges: 1. The Company has a floating charge on all of its assets and on its outstanding share capital, with respect to its short-term and long-term loans, and credit lines in favor of two individual banks. 2. All financed equipment is pledged in favor of the related financial institution. F-29 111 PARADIGM GEOPHYSICAL LTD. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE 11:- SEGMENTS, CUSTOMERS AND GEOGRAPHICS INFORMATION a. Operating data: In the year 2000, the Company began to evaluate its business as two separate operating segments. 1. Products - consist of software products, software licenses that require significant customization, maintenance and support, training and installation. 2. Services - consist of professional services of seismic data processing, interpretation, and reservoir-studies services. The information evaluated by the Company's decision makers in deciding how to allocate resources to these segments are total revenues, cost of revenues, depreciation of property and equipment, segment profit and segments assets as presented is the consolidated statements of operations and balance sheets. In prior years, the Company operated and reported in its management internal reporting in a single segment - providing of software licenses, seismic data processing and interpretation services. Prior years have been restated in order to reflect the new internal reporting form. The accounting policy of the segments are in accordance with the requirements of Statement of Financial Accounting Standards ("SFAS") 131 "Disclosure about Segments of an Enterprise and Related Information". Segment revenues, cost of revenues, depreciation, assets and other data are as follows (in thousands):
YEAR ENDED DECEMBER 31, 2000 ---------------------------- PRODUCTS SERVICES RECONCILIATION CONSOLIDATED -------- -------- -------------- ------------ Revenues $ 46,390 $ 16,908 $ -- $ 63,298 Cost of revenues 10,816 6,352 -- 17,168 Depreciation 609 1,827 2,310 4,746 --------- --------- --------- --------- Segment profit $ 34,965 $ 8,729 $ (2,310) $ 41,384 ========= ========= ========= =========
F-30 112 PARADIGM GEOPHYSICAL LTD. AND ITS SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS - --------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1999 ---------------------------------------------------------------- PRODUCTS SERVICES RECONCILIATION CONSOLIDATED --------- --------- -------------- ------------ Revenues $ 43,023 $ 11,483 $ - $ 54,506 Cost of revenues 12,418 5,804 - 18,222 Depreciation 448 1,395 2,022 3,865 --------- --------- --------- --------- Segment profit $ 30,157 $ 4,284 $ (2,022) $ 32,419 ========= ========= ========= =========
YEAR ENDED DECEMBER 31, 1998 ---------------------------------------------------------------- PRODUCTS SERVICES RECONCILIATION CONSOLIDATED -------- -------- -------------- ------------ Revenues $38,074 $ 7,288 $ - $ 45,362 Cost of revenues 8,559 3,107 - 11,666 Depreciation 385 972 941 2,298 ------- ------- ---------- --------- Segment profit $29,130 $ 3,209 $ (941) $ 31,398 ======= ======= ========== =========
F-31 113 PARADIGM GEOPHYSICAL LTD. AND ITS SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- Segments assets are as follows (in thousands):
DECEMBER 31, ----------------------------- 1998 1999 2000 ------- ------- ------- Products $ 1,584 $ 2,264 $ 2,622 Services 4,284 6,692 8,520 Other 3,391 3,051 2,176 ------- ------- ------- Total segment assets $ 9,259 $12,007 $13,318 ======= ======= =======
b. Geographic operational information: Net revenues attributed to countries based on the location of the end customers are as follows (in thousands):
YEAR ENDED DECEMBER 31, ------------------------------------------- 1998 1999 2000 -------- -------- --------- North and South America $21,721 $24,219 $32,104 EMEA 12,962 14,604 19,240 Far East 10,679 15,683 11,954 ------- ------- ------- $45,362 $54,506 $63,298 ======= ======= =======
Long-lived assets are as follows (in thousands):
DECEMBER 31, -------------------------------------- 1998 1999 2000 -------- -------- -------- North and South America $ 7,858 $ 7,932 $ 7,232 EMEA 1,709 1,704 17,270 Far East 1,003 1,074 1,029 Israel 8,794 16,016 13,392 -------- -------- -------- $ 19,364 $ 26,726 $ 38,923 ======== ======== ========
c. Major customers: The Company had one major customer, which accounted for approximately 0%, 12% and 3% of the Company's revenues, for the years ended December 31, 1998, 1999 and 2000, respectively. F-32 114 PARADIGM GEOPHYSICAL LTD. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE 12:- SELECTED STATEMENTS OF OPERATIONS DATA a. Non recurring expenses (in thousands):
YEAR ENDED DECEMBER 31, ----------------------------- 1998 1999 2000 ------ -------- ------- Lease termination costs $ -- $ 763 $ -- Impairment of development technology -- 1,595 -- Other -- 347 -- ------ -------- ------- $ -- $ 2,705 $ -- ====== ======== ======= b. The following table sets forth the reconciliation of basic and diluted net earnings (loss) per share (in thousands except share and per share data): Numerator: Net earnings (loss) to shareholders of Ordinary shares $4,552 $ (3,778) $ 2,359 ====== ======== ======= Numerator for diluted net earnings (loss) per share - Net earning (loss) available to shareholders of Ordinary shares $4,552 $ (3,778) $ 2,359 ====== ======== ======= Denominator: Weighted average number of Ordinary shares (denominator for basic net earnings(loss) per share) 6,850 12,205 13,504 ------ -------- ------- Effect of securities: Employee stock options 145 *) -- 225 Warrants issued to third parties 196 *) -- 60 Convertible Preferred shares for the period outstanding prior to conversion into Ordinary shares 2,115 *) -- -- ------ -------- ------- Dilutive potential of Ordinary shares 2,456 *) -- 285 ------ -------- ------- Denominator for diluted net earnings (loss) per share - 9,306 12,205 13,789 ====== ======== =======
*) Anti-dilutive. F-33 115 PARADIGM GEOPHYSICAL LTD. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE 13:- SUBSEQUENT EVENTS (UNAUDITED) a. In April 2001, the Company acquired all the rights of a product line and related customer services from Oilfield Systems Limited. b. In May 2001, the Company acquired Sysdrill Limited, a Scottish company, for a cash consideration and issuance of the Company's Ordinary shares. The acquired company provides software and service of drilling engineering and well operations solutions. c. In May 2001, the Company entered into a capital expenditure commitment for computer hardware of $900,000. - - - - - - - - - - - - - F-34 116 EXHIBIT INDEX EXHIBIT NO. EXHIBIT PAGE 1.2 Amended and Restated Articles of Association. 4.18 Securities Purchase Agreement, dated October 4, 2000, by and between Compagnie Generale de Geophysique and Paradigm Geophysical Ltd. and Paradigm Geophysical Corp. with respect to Flagship S.A. and Flagship Geosciences LLC. 8.1 Subsidiaries of Paradigm Geophysical Ltd. 10.1 Consent of Kost Forer and Gabbay. EX-99.1.2 2 y50410ex99-1_2.txt AMENDED AND RESTATED ARTICLES OF ASSOCIATION 1 THE COMPANIES LAW, 5759 - 1999 ------------------------------ A COMPANY LIMITED BY SHARES --------------------------- ARTICLES OF ASSOCIATION OF PARADIGM GEOPHYSICAL LTD. AMENDED AND RESTATED AS OF NOVEMBER 30, 2000 2 THE COMPANIES LAW, 5759 - 1999 ------------------------------ A COMPANY LIMITED BY SHARES --------------------------- ARTICLES OF ASSOCIATION OF PARADIGM GEOPHYSICAL LTD. ------------------------------------------------------------------------ INTERPRETATION 1. In these Articles, the words in the first column of the following table shall bear the meanings set opposite them respectively in the second column thereof, if not inconsistent with the subject or context:
Words Meanings ----- -------- The Company The above-named Company. Companies Law The Companies Law 5759 - 1999 (the "Companies Law") and all orders and regulations issued thereunder as amended from time to time, including any law or statute replacing it. The Statutes The Companies Law, the Securities Law of 1968 and every other ordinance or law for the time being in force concerning companies and affecting the Company. These Articles These Articles of Association, as shall be amended from time to time. Officer A Director, President, General Manager, Chief Executive Officer, Vice President, Chief Financial Officer, any other manager directly subordinate to the President, and any person who fills one of the said positions in the Company, even if he carries a different title. Audit Committee As defined in the Companies Law.
3 The Office The registered office of the Company. The Seal Any of (i) the rubber stamp of the Company, (ii) the facsimile signature of the Company, or (iii) the electronic signature of the Company as approved by the Board of Directors. Shareholders Register The shareholders register required to be kept according to the Companies Law and any other shareholders register permitted to be kept by the Company according to the Companies Law. Month A Gregorian month. NIS New Israeli Shekel Writing Printing, lithography, photography and any other mode or modes of representing or reproducing words in a visible form.
Words importing the masculine gender shall include the feminine gender, and words importing person shall include corporations. Subject as aforesaid, any words or expressions defined in the Statutes shall, except where the subject or context forbids, bear the same meanings in these Articles. LIABILITY OF SHAREHOLDERS;, PUBLIC COMPANY; OBJECTS 3. : (a) The liability of its shareholders is limited by shares..; (b) The Company is a Public Company as such term is defined in the Companies Law. (c) The objects of the Company are to engage in any lawful activity. (d) SHARE CAPITAL 4. (a) The share capital of the Company is NIS ten million (10,000,000), divided into: (i) 18,000,000 Ordinary Shares of NIS 0.5 nominal value each ("Ordinary Shares"); and (ii) 2,000,000 Special Preferred Shares of NIS 0.5 nominal value each ("Special Preferred Shares"). - 2 - 4 Except as otherwise provided herein, the shares of each class will rank pari passu with all the other shares in that class. (b) Each Ordinary Share entitles its holder to receive notice of, and to participate in, all General Meetings of the Company, and to one (1) vote in such meetings for every share, and the other rights specified in these Articles. (c) The Special Preferred Shares may be issued from time to time as shares of one or more series, with such distinctive serial designations as may be stated or expressed in the resolution or resolutions providing for the issuance of such shares from time to time adopted by the Board of Directors of the Company. In the resolution or resolutions providing for the issuance of such shares, the Board of Directors of the Company is expressly authorized, without the need for shareholder action, to fix the terms and preferences of the shares of such series, including without limitation the dividend rate, number of shares, and the terms upon which the shares are convertible into or exchangeable for shares of any other class or classes. AMENDMENT OF ARTICLES 5. These Articles (with the exception of Article 100 which may be amended as provided therein) may be amended by a majority vote at a meeting of shareholders of the Company, with the exception of Article 100 which may be amended only by the affirmative vote of seventy-five percent of the shareholders present (in person or by proxy) and voting on such resolution at a General Meeting. If the Company's shares are divided into classes of shares, then a change that infringes on the rights of a class of shares shall be made only with the approval of a General Meeting of that class; the provisions of these Articles shall apply, mutatis mutandis, to the adoption of decisions by a class meeting. Notwithstanding the provisions of this Article , a change of these Articles that obligates a shareholder to acquire additional shares or to increase the extent of his liability shall not obligate the shareholder without his consent. SHARES 6. Subject to these Articles or to the terms of any resolution creating new shares, the unissued shares in the registered share capital of the Company from time to time shall be under the control of the Board of Directors, which shall have the power to allot shares or otherwise dispose of them to such persons, on such terms and conditions, and either at par or at a premium or, subject to the provisions of the Statutes, at a discount, and at such times as the Board of Directors may think fit, and the power to give to any person the option to acquire from the Company any shares, either at nominal value or at a premium or, subject as aforesaid, at a discount, during such time and for such consideration as the Board of Directors may determine. - 3 - 5 7. If two or more persons are registered as joint holders of any share, any one of such persons may give effectual receipts for any dividends or other monies in respect of such share. The Company shall not be required to recognize any holder of a share as a holder other than the registered holder of such share. 8. Every shareholder registered in the Shareholders' Register shall be entitled, without payment, to receive within thirty days after allotment or registration of transfer (unless the conditions of issuance provide for a longer interval), one certificate under the Seal for all the shares registered in his name, and if the Board of directors so approves, several certificates, each for one or more of such shares. Each certificate shall specify the number and denoting numbers of the shares in respect of which it is issued and may also specify the amount paid up thereon; provided that, in the case of joint holders, the Company shall not be bound to issue more than one certificate to all the joint holders, and delivery of such certificate to one of them shall be sufficient delivery to all. Every certificate shall be signed by one Director and countersigned by the Secretary or some other person nominated by the Board of Directors for this purpose. 9. If any share certificate shall be defaced, worn out, destroyed or lost, it may be renewed on such evidence being produced, and such indemnity (if any) being given as the Board of Directors shall require and (in the case of defacement or wearing out) upon delivery of the old certificate and, in any case, upon payment of such sum not exceeding NIS 50 (fifty New Israeli Shekels) as the Board of Directors may from time to time require. 10. The Company may, directly or indirectly, purchase its own shares subject to the provisions of the Companies Law. If the Company purchases its own shares, such shares will not have any rights as long as they are owned by the Company. 11. (a) A subsidiary or some other corporate body under the Company's control (in this Article: "ACQUIRING CORPORATE BODY") may acquire shares of the Company subject to the provisions of the Companies Law, on condition that the subsidiary's Board of Directors or the Directors of the acquiring corporate body determined that - had the acquisition been made by the Company - it would have been permitted by the provisions of the Companies Law. (b) If the Company's shares were acquired by a subsidiary or by an acquiring corporate body, such shares shall not grant voting rights as long as they are owned by the subsidiary or by the acquiring body corporate. (c) If a prohibited distribution (as defined in Section 301 to the Companies Law) was made, then the refund specified in Section 310 to the Companies Law shall be made to the subsidiary or to the acquiring body corporate and the provisions of Section 311 shall apply, mutatis mutandis, to the Directors of the subsidiary and to the Directors of the acquiring body corporate. However, if the Company's Board of Directors determined that the distribution is permitted, then the responsibility shall be that of the Company's Directors, as provided in Section 311 to the Companies Law. (d) Notwithstanding the provisions of Sub-article (a), acquisition by a subsidiary or by an acquiring corporate body that is not wholly owned by the Company constitutes a - 4 - 6 distribution in an amount equal to the amount of the acquisition, multiplied by the proportion of rights in the subsidiary's capital or in the capital of the acquiring corporate body held by the Company. TRANSFER OF SHARES 12. No transfer of shares shall be registered unless a proper writing or instrument of transfer (in any customary form or any other form satisfactory to the Board of Directors) has been submitted to the Company (or its transfer agent), together with the share certificate(s) and such other evidence of title as the Board of Directors may reasonably require. Until the transferee has been registered in the Shareholders Register (which the Company guarantees to perform promptly from submission to it of the foregoing) in respect of the shares so transferred, the Company may continue to regard the transferor as the owner thereof. 13. The Board of Directors may refuse, without giving any reasons therefor, to register any transfer of shares where the Company has a lien on the shares, constituting the subject matter of the transfer, but fully paid-up shares may be transferred freely and such transfers do not require the approval of the Board of Directors. All instruments of transfer shall remain in the custody of the Company, but any such instrument which the Board of Directors refused to register shall be returned to the person from whom it was received, if such request be made by him. 14. The Transfer Records and the Shareholders Register and Debenture Holders (if any) Register and Debenture Stock Holders (if any) Register and other securities (if any) Register of the Company may be closed during such time as the Board of Directors may deem fit, not exceeding, in the aggregate, thirty (30) days in each year. TRANSMISSION OF SHARES 15. In the case of the death of a shareholder, or a holder of a debenture, the survivor or survivors, where the deceased was a joint holder, and the executors and/or administrators and/or the legal heirs of the deceased where he was a sole or only surviving holder, shall be the only persons recognized by the Company as having any title to his shares or his debentures, but nothing herein contained shall release the estate of a deceased joint holder from any liability in respect of any share or any debenture jointly held by him. 16. Any person who becomes entitled to a share or a debenture in consequence of the death or bankruptcy or any shareholder may, upon producing such evidence of title as the Board of Directors shall require, with the consent of the Board of Directors, be registered himself as holder of the share or the debenture or, subject to the provisions as to transfers herein contained, transfer the same to some other person. 17. A person entitled to a share or a debenture by transmission shall be entitled to receive, and may given a discharge for, any dividends or interest or other monies payable in respect of the share or - 5 - 7 debenture, but he shall not be entitled in respect of it to receive notices of, or to attend or vote at meetings of the Company or, save as aforesaid, to exercise any of the rights or privileges of a shareholder or a holder of a debenture unless and until he shall become a shareholder in respect of the share or a holder of the debenture. ALTERATIONS OF CAPITAL 18. Subject to the provisions of the Companies Law, the Company may from time to time by a majority vote at a meeting of shareholders of the Company: (a) consolidate and divide all or any of its share capital into shares of larger amount than its existing shares; or (b) cancel registered share capital that has not yet been issued, on condition that there are no undertakings of the Company - including conditional undertakings - to issue such shares; or (c) divide its share capital or any part thereof into shares of smaller amount than is fixed by its Articles of Association by sub-division of its existing shares or any of them , and so that as between the resulting shares, one or more of such shares may, by the Resolution by which such sub-division is effected, be given any preference or advantage as regards dividend, return of capital, voting or otherwise over the others or any other shares; or (d) reduce its share capital and any capital redemption reserve fund in any way that may be considered expedient. 19. The Company may, subject to the Companies Law, issue redeemable shares and redeem the same according to the terms and conditions which the Company shall determine. INCREASE OF CAPITAL 20. The Company may from time to time by a majority vote at a meeting of shareholders, whether all the shares for the time being authorized shall have been issued or all the shares for the time being issued shall have been fully called up or not, increase its share capital by the creation of new shares; such new capital to be of such amount and to be divided into shares of such respective amounts and (subject to any special rights for the time being attached to any existing class of shares) to carry such preferential, deferred or other special rights (if any) or to be subject to such conditions or restrictions (if any) in regard to dividend, return of capital, voting or otherwise as the General Meeting deciding upon such increase directs. 21. Except so far as otherwise provided by or pursuant to these Articles or by the conditions of issuance, any new share capital shall be considered as part of the original ordinary share capital of the Company, and shall be subject to the same provisions with reference to liens, transfer, transmission and otherwise as the original share capital. - 6 - 8 MODIFICATION OF CLASS RIGHTS 22. If, at any time, the share capital is divided into different classes of shares, the rights attached to any class (unless otherwise provided by the terms of issuance of the shares of that class) may be varied with the consent in writing of the holders of all the issued shares of that class, or with the sanction of a majority vote at a meeting of the shareholders passed at a separate meeting of the holders of the shares of the class. The provisions of these Articles relating to General Meetings shall apply, mutatis mutandis, to every such separate General Meeting. Any holder of shares of the class present in person or by proxy may demand a secret poll. 23. Unless otherwise provided by the conditions of issuance, the enlargement of an existing class of shares, or the issuance of additional shares thereof, shall not be deemed to modify or abrogate the rights attached to the previously issued shares of such class or of any other class. BORROWING POWERS 24. The Board of Directors may from time to time, in its discretion, cause the Company to borrow or secure the payment of any sum or sums of money for the purposes of the Company, and may secure or provide for the repayment of such sum or sums in such manner, at such times and upon such terms and conditions in all respects as it sees fit and, in particular, by the issuance of bonds, perpetual or redeemable debentures, debenture stock, or any mortgages, charges or other securities on the undertaking, or the whole or any part of the property of the Company, both present and future, including units uncalled or called but unpaid capital for the time being. POWERS OF THE GENERAL MEETING 25. Without derogating from the authority of the General Meeting pursuant to these Articles, the Company's decisions on the following matters shall be adopted at a General Meeting: (1) any changes in these Articles; (2) exercise of the powers of the Board of Directors in accordance with the provisions of Section 52(a) of the Companies Law; (3) appointment of the Company's Auditor; (4) appointment of External Directors, in accordance with the provisions of the Companies Law; (5) approval of acts and transactions that require approval by the General Meeting under the provisions of Articles 255 and 268 to 275 of the Companies Law; (6) the increase and reduction of the registered share capital, in accordance with the provisions of Articles 286 and 287 to the Companies Law; - 7 - 9 (7) a merger, as specified in Article 320(a) to the Companies Law. GENERAL MEETINGS 26. (a) General Meetings shall be held at least once in every calendar year at such time, not being more than fifteen months after the holding of the last preceding General Meeting, and at such time and place as may be determined by the Board of Directors. Such Annual General Meetings shall be called "Annual Meetings", and all other General Meetings of the shareholders shall be called "Special Meetings". The Annual Meeting shall receive and consider the Directors' Report, the Financial Statements, appoint auditors, elect directors, and transact any other business which, under these Articles or by the Companies Law, may be transacted at a General Meeting of the Company, provided that notice of such other business was given to shareholders in accordance with the provisions of these Articles. At a General Meeting, decisions shall be adopted only on matters that were specified on the agenda. (b) Any reference in these Articles to a "General Meeting" will be either a General Meeting or a Special Meeting, according to the context. 27. The Board of Directors may, whenever it deems necessary, and shall upon such requisition in writing as is provided by Section 63(b) of the Companies Law, convene a General Meeting. Any such request must state the purposes for which the meeting is to be called, be signed by the requesting shareholders, and must be deposited at the Office. Such request may consist of several documents in like form, each signed by one or more requesting shareholder. 28. Unless a longer period for notice is prescribed by the Companies Law, at least ten (10) days and not more than sixty (60) days notice of any General Meeting shall be given, specifying the place, the day and the hour of meeting and, in the case of special business, the nature of such business, shall be given in the manner hereinafter mentioned, to such shareholders as are under the provisions of these Articles, entitled to receive notices from the Company. Notices shall be given by mail or by personal delivery to every registered shareholder of the Company, to his address as described in the Shareholders Register of the Company or such other address as designated by him in writing for this purpose. Provided that the accidental omission to give such notice to, or the non-receipt of such notice by, any such shareholder shall not invalidate any resolution passed or proceeding held at any such meeting and, with the consent of all the shareholders for the time being entitled to receive notice of meetings, a meeting may be convened upon a shorter notice or without notice, and generally in such manner as such shareholders may approve. Such consent may be given at the meeting or retrospectively after the meeting. If the shareholder did not provide the Company any address for the delivery of notices, the shareholder shall be deemed to have waived his right to receive notices. 29. Only shareholders of record as reflected on the Company's Share Register at the close of business on the date fixed by the Board of Directors as the record date determining the then shareholders who will be entitled to vote, shall be entitled to notice of, and to vote, in person or by proxy, at a General Meeting and any postponement or adjournment thereof. The Board of Directors will fix - 8 - 10 the record date of not less than ten (10) nor more than sixty (60) days before the date of the General Meeting. PROCEEDINGS AT GENERAL MEETINGS 30. No business shall be transacted at any General Meeting unless a quorum is present when the meeting proceeds to business. The quorum at any Meeting shall be two shareholders present in person or by proxy, holding or representing at least twenty five percent (25%) of the total voting rights in the Company. A company being a shareholder shall be deemed to be personally present for the purpose of this Article if represented by its representative duly authorized in accordance with Article 42. 31. If, within half an hour from the time appointed for the holding of a General Meeting, a quorum is not present, the meeting shall stand adjourned to the same day in the next week at the same time and place, or any time and hour as the Board of Directors shall designate and state in a notice to the shareholders entitled to vote at the original meeting, and if, at such adjourned meeting, a quorum is not present within half an hour from the time appointed for holding the meeting any two shareholders present in person or by proxy shall constitute a quorum. Notwithstanding the aforesaid, if a General Meeting was convened at the demand of shareholders as permitted by Section 63(b) of the Companies Law, then a quorum at such adjourned meeting shall be present only if one or more shareholders are present who held in the aggregate at least 5% of the issued share capital of the Company and at least 1% of the voting rights in the Company or one or more shareholders who hold in the aggregate at least 5% of the voting rights in the Company. 32. (a) At every General Meeting, a chairman shall be elected for that meeting. (b) The election of the meeting's chairman shall be held at the beginning of the meeting's discussions, which shall be opened by the chairman of the Board of Directors or by a Director whom the Board of Directors authorized to do so. 33. The chairman may, with the consent of any meeting at which a quorum is present, and shall, if so directed by the meeting, adjourn any meeting from time to time and from place to place as the meeting shall determine. Whenever a meeting is adjourned pursuant to the provisions of this Article for more than seven days, notice of the adjourned meeting shall be given in the same manner as in the case of an original meeting. Save as aforesaid, no shareholder shall be entitled to any notice of an adjournment, or of the business to be transacted at an adjourned meeting. No business shall be transacted at any adjourned meeting other than the business which might have been transacted at the meeting from which the adjournment took place. VOTES OF SHAREHOLDERS 34. Except as otherwise provided in these Articles, any resolution at a General Meeting shall be deemed adopted if approved by the holders of a majority of the voting rights in the Company represented at the meeting in person or by proxy and voting thereon. In the case of an equality of - 9 - 11 votes, either on a show of hands or a poll, the chairman of the meeting shall not be entitled to a further or casting vote. 35. At all General Meetings, a resolution put to a vote at the meeting shall be decided on a show of hands unless, before or upon the declaration of the result of the show of hands, a poll in writing be demanded by the chairman (being a person entitled to vote), or by at least two shareholders present, in person or by proxy, holding at least 5% of the issued share capital of the Company and, unless a poll be so demanded, a declaration by the chairman of the meeting that a resolution has been carried, or has been carried unanimously or by a particular vote, or lost, or not carried by a particular vote, shall be conclusive, and an entry to that effect in the Minute Book of the Company shall be conclusive evidence thereof, without proof of the number or proportion of the votes recorded in favor of or against such resolution. 36. If a poll be demanded in manner aforesaid, it shall be taken forthwith, and the result of the poll shall be deemed to be the resolution of the meeting at which the poll was demanded. The demand of a poll shall not prevent the continuance of a meeting for the transaction of any business other than the question on which a poll has been demanded. 37. Any shareholder which is not a natural person may, by resolution of its directors or other governing body, authorize such person as it thinks fit to act as its representative at any General Meeting, and the person so authorized to the satisfaction of the Company shall be entitled to exercise the same powers on behalf of such company, which he represents as that company could exercise if it were an individual shareholder. 38. Subject to any rights or restrictions for the time being attached to any class or classes of shares, every shareholder shall have one vote for each share of which he is the holder, whether on a show of hands or on a poll. 39. If any shareholder be a lunatic, idiot, or non compos mentis, he may vote by his committee, receiver, curator bonis or other legal curator, and such last-mentioned persons may give their votes either personally or by proxy. 40. If two or more persons are jointly entitled to a share then, in voting upon any question, the vote of the senior person who tenders a vote, whether in person or by proxy, shall be accepted to the exclusion of the votes of the other registered holders of the share and, for this purpose, seniority shall be determined by the order in which the names stand in the Shareholders Register. 41. Votes may be given either personally or by proxy. A proxy need not be a shareholder of the Company. 42. (a) The instrument appointing a proxy shall be in writing in the usual common form, or such form as may be approved by the Board of Directors, and shall be signed by the appointor or by his attorney duly authorized in writing or, if the appointor is a corporation, the corporation shall vote by its representative, appointed by an instrument duly signed by the corporation. - 10 - 12 (b) The instrument appointing a proxy shall be deemed to include authorization to demand a poll or to vote on a poll on behalf of the appointor. 43. A vote given in accordance with the terms of an instrument of proxy shall be valid notwithstanding the previous death or insanity of the principal, or revocation of the proxy, or transfer of the share in respect of which the vote is given, unless an intimation in writing of the death, revocation or transfer shall have been received at the Office before the commencement of the meeting or adjourned meetings at which the proxy is used. 44. The instrument appointing a proxy shall be deposited at the Office or at such other place or places, whether in Israel or elsewhere, as the Board of Directors may from time to time, either generally or in a particular case or class of cases prescribe, at least forty-eight (48) hours before the time appointed for holding the meeting or adjourned meeting at which the person named in such instrument proposes to vote; otherwise, the person so named shall not be entitled to vote in respect thereof; but no instrument appointing a proxy shall be valid after the expiration of twelve months from the date of its execution. 45. Subject to the provisions of the Companies Law, a resolution in writing (approved by letter, telex, facsimile or otherwise) by all the shareholders, in person or by proxy, for the time being entitled to vote at a General Meeting of the Company, shall be as valid and as effectual as a resolution adopted by a General Meeting duly convened, held and constituted for the purpose of passing such resolution. 46. A shareholder will be entitled to vote at the Meetings of the Company by several proxies appointed by him, provided that each proxy shall be appointed with respect to different shares held by the appointing shareholder. Every proxy so appointed on behalf of the same shareholder shall be entitled to vote as he sees fit. 47. No person shall be entitled to vote at any General Meeting (or be counted as a part of the quorum thereof) unless all calls then payable by him in respect of his shares in the Company shall have been paid. DIRECTORS POWERS AND RESPONSIBILITIES OF THE BOARD OF DIRECTORS 48. (a) Without derogating from the authority of the General Meeting pursuant to these Articles and the Companies Law, the Board of Directors shall formulate the Company's policy and shall supervise the exercise of the General Manager's office and his acts, and as part thereof it - (1) shall determine the Company's plans of activity, the principles for financing such plans and the order of priority among them; (2) shall examine the Company's financial situation and set the framework of credit which the Company may take; (3) shall determine the organizational structure and the compensation policy of employees; (4) may decide to issue a series of debentures; - 11 - 13 (5) is responsible for the preparation and approval of the financial reports according to Section 171 to the Companies Law; (6) shall report to the Annual Meeting about the state of the Company's affairs and on its business results, as required by Section 173 to the Companies Law; (7) shall appoint and dismiss the General Manager, as provided by Section 250 to the Companies Law; (8) shall decide on the acts and transactions that require its approval in accordance with these articles or under the provisions of Sections 255 and 268 to 275 to the Companies Law; (9) may issue shares and securities convertible into shares up to the limit of the Company's registered share capital, under the provisions of Section 288 to the Companies Law; (10) may decide on a distribution according to Sections 307 and 308 to the Companies Law; (11) shall express its opinion on a special purchase offer, according to Section 329 to the Companies Law. (b) The powers of the Board of Directors under this Article cannot be delegated to the General Manager. DIRECTORS 49. The Board of Directors of the Company shall consist of a minimum of two (2) and a maximum of eleven (11) Directors. 50. (a) Except for External Directors (as defined in the Companies Law) and the Chief Executive Officer, and subject to Articles 57 and 58, all directors shall be elected at the Annuel Meeting of Shareholders and shall hold office until the close of business of the Annual Meeting held in the year following their election and until their successors have been duly elected and qualified. (b) The Company may, by a resolution of a General Meeting, remove any Director appointed according to Article 50(a) and Article 57 from office before the expiration of his term. (c) The Company shall appoint External Directors as and to the extent required by, and they shall hold office according to, the Companies Law, as long as the Company is required by the Companies Law to appoint External Directors. (d) The Chief Executive Officer of the Company shall by virtue of his office always serve as a director of the Company and his term of office shall expire automatically and immediately upon the effective date of the termination of his employment as Chief Executive Officer of the Company. 51. (a) No person shall be nominated for the office of a director at a General Meeting, except for directors whose term of office expired at the time the General Meeting was convened, - 12 - 14 persons nominated for the office of a director by the Board of Directors, and as provided for in Article 51(b). (b) Any shareholder entitled to receive notice of and vote at a General Meeting desiring to propose a nominee for director to be elected at an Annual General Meeting of Shareholders has to deliver notice to the Secretary, at the Company's principal offices, not later than ninety (90) days prior to the date of the annual General Meeting at which meeting such election is to occur, whichever date is later. The notice shall set forth: (i) the name and address, as they appear on the Company's share register, of the shareholder proposing such nominee, (ii) the identity and background of the nominee, (iii) the class and number of shares of the Company beneficially owned by such shareholder, (iv) a representation that such shareholder is a shareholder of record and intends to appear by person or by proxy at such General Meeting to bring the General Meeting the nominee specified in the notice, (v) a brief description of the reasons for wanting to nominate such nominee as a director, (vi) any material interest that the shareholder has in the election of such nominee and (vii) the written consent of the nominee to be elected as a director of the Company. 52. The Directors in their capacity as such, shall be entitled to receive remuneration and reimbursement of expenses incurred by them in the course of carrying out their duties as Directors. 53. The office of a Director shall be vacated, ipso facto: (a) upon his resignation by written notice signed by him and delivered to the Office; (b) if he becomes bankrupt or enters into an arrangement with his creditors; (c) if he is or becomes of unsound mind; (d) if he be relieved of his office as provided in Article 50(b) hereof; (e) if he is prevented by applicable law from serving as a director of the Company. (f) if the Board of Directors terminate his office according to Section 231 of the Companies Law; (g) if court order is given according to Section 233 of the Companies Law. 54. (a) Subject to the provisions of the Companies Law, no Director shall be disqualified by virtue of his office from holding any office, or deriving any profit from any other office in the Company or from any company in which the Company shall be a shareholder or otherwise interested, or from contracting with the Company as a vendor, purchaser or otherwise. (b) Transactions entered into by the Company in which an office holder of the Company has a personal interest, directly or indirectly, will be valid in respect of the Company and the office holder only if approved by the Company's Board of Directors and, if such - 13 - 15 transactions are "irregular transactions" as defined in the Companies Law, only if approved in accordance with the requirements of the Companies Law. 55. A Director who has a personal interest in a matter which is brought for discussion before the Board of Directors may participate in said discussion, provided that he shall neither vote in nor attend discussions concerning the approval of the activities or the arrangements. If said Director did vote or attend as aforesaid, the approval given to the aforesaid activity or arrangements shall be invalid. 56. In the event of one or more vacancies on the Board of Directors, the continuing Directors may continue to act as long as the Board of Directors consists of at least a majority of the total number of Directors elected. However, in the event that the remaining Directors are not a majority of the total number of Directors elected, the remaining Director or Directors may call for the convening of a General Meeting for the purpose of the election of Directors. 57. Subject to the limitation on the number of Directors as specified in Article 49, the Board of Directors may, at any time and from time to time, appoint any other person as a Director, whether to fill a vacancy or to add to their number. Any Director so appointed shall hold office until the next Annual Meeting and may be re-elected. 58. In case of any increase in the number of directors, the additional director or directors, and in case of any vacancy in the Board of Directors due to a death, resignation, removal, disqualification or any other cause, the successors appointed according to Article 57 to fill the vacancies shall be elected by a majority of the directors then in office. CONVENING THE BOARD OF DIRECTORS 59. (a) The Chairman of the Board of Directors may convene a meeting of the Board of Directors at any time. (b) The Board of Directors shall hold a meeting on a specified subject on the demand of two Directors, or if the Board of Directors consists of up to five Directors - one Director; (c) The Chairman of the Board of Directors shall convene the Board of Directors upon a demand said in Sub-article (b) of this Article 59 or if Section 122(d) to the Companies Law applies, due to a notice or report from the General Manager or Chief Executive Officer (CEO) or or due to a notice from the Auditor of the Company under Section 169 to the Companies Law. (d) If a meeting of the Board of Directors was not convened within 14 days after the date of a demand pursuant to Sub-article (b) of this Article 59, or after the date of a notice or report of the General Manager according to Section 122(d) to the Companies Law, or after notice of the Auditor under Section 169 to the Companies Law, then each of those persons enumerated in Sub-articles (b) and (c) may convene a meeting of the Board of Directors, which shall discuss the subject specified in the demand, notice or report, as the case may be. - 14 - 16 MEETINGS OF THE BOARD OF DIRECTORS AND THEIR CONDUCT 60. The agenda of a meeting of the Board of Directors shall be set by the Chairman of the Board of Directors, and it shall include: (1) subjects determined by the Chairman of the Board of Directors; (2) subjects determined as said in Section 98 to the Companies Law; (3) any subject which a Director or the General Manager requested at a reasonable time before the meeting was convened - of the Chairman of the Board of Directors to include in the agenda 61. (a) Notice of a meeting of the Board of Directors shall be delivered to all its members at a reasonable time before the meeting, but not later than forty eight (48) hours prior to the time set for any such meeting, (b) A notice under Sub-article (a) shall be delivered to the Director's address that was given to the Company in advance, and in it shall be stated the time of the meeting and the place where it will convene, as well as reasonable details on all the subjects on the agenda. 62. Notwithstanding the provision of Article 61 hereto, the Board of Directors may - with the consent of all the Directors - convene for a meeting without notice. GENERAL MANAGER 63. The Board of Directors will appoint one or more persons as General Manager, and they will be titled as Chief Operating Officer (COO) or President, or a combination of these titles. The Board of Directors may from time to time remove or discharge him or them from office (subject to the provisions of any agreement between any such person and the Company) and appoint another or others in his or their place or places. 64. [ReserveD]. 65. To the extent permitted by the Companies Law, the Board of Directors may from time to time confer upon and delegate to a CEO, President, COO or Chief Financial Officer (CFO) then holding office, such authorities and duties of the Board of Directors as they may deem fit, and they may delegate such authorities and duties for such period and for such purposes and subject to such conditions and restrictions which they consider in the bests interests of the Company, and they may delegate such authorities and duties without waiving the authorities of the Board of Directors with respect thereto and it may from time to time revoke, cancel and alter such authorities and duties in whole or in part. 66. The remuneration of a CEO, COO, CFO and President shall be fixed by the Board of Directors, taking into consideration any agreement between him and the Company, and it may be in whole or in part, in the form of salary, share options, or commissions or profit sharing or a combination thereof. - 15 - 17 DIRECTOR'S ACTS AND AUTHORITIES 67. The management of the business of the Company shall be vested in the Board of Directors, which may exercise all such powers and do all such acts and things as the Company is authorized to exercise and do, and are not hereby or by law required to be exercised or done by the Company in a General Meeting. The authority conferred on the Board of Directors by this Article 67 shall be subject to the provisions of the Companies Law, of these Articles and any regulation or resolution consistent with these Articles adopted from time to time by the Company in a General Meeting, provided, however that no such regulation or resolution shall invalidate any prior act done by or pursuant to a decision of the Board of Directors which would have been valid if such regulation or resolution had not been adopted. 68. The Directors may postpone their meetings and otherwise regulate them as they shall deem fit. The quorum for the dispatch of business by the Board of Directors shall be determined by the Directors and, if not so determined, shall be the majority of the Directors then holding office. 69. A resolution in writing signed or otherwise approved in writing (by letter, telegram, telex, facsimile, electronic mail or otherwise) by all the Directors then in office shall be as valid and as effectual as a resolution adopted by the Board of Directors at a meeting of the Board of Directors duly convened and held. 70. Members of the Board of Directors, or of any committee designated by the Board of Directors, may participate in a meeting of the Board of Directors, or of any committee, by means of a telephone conference or similar communications equipment by means of which all persons participating in the meeting can hear each other, and such participation in a meeting shall constitute attendance in person at the meeting. 71. (a) The Board of Directors shall elect a Chairman for the meeting and fix the term of his office. The General Manager shall not serve as Chairman of the Board of Directors and vice versa unless the holders of two thirds of the voting rights in the Company represented in person or by proxy and voting on such resolution at a General Meeting, who are not controlling shareholders of the Company or their representatives and who are present at the vote, adopt a decision to appoint the Chairman of the Board of Directors as the General Manager, for a period not exceeding three years after the date of the adoption of the decision. (b) In the event that a Chairman was not elected or if the Chairman should fail to be present at a meeting fifteen (15) minutes after the time set for its convening, the remaining Directors shall elect one of those present to be Chairman of the meeting. (c) All questions that arise at meetings of the Board of Directors shall be decided by a majority of votes. In the event of a tie vote, the Chairman of the Board of Directors shall not cast the deciding vote. 72. Any meeting of the Board of Directors at which a quorum is present shall have the authority to exercise all or part of the authorities, powers of attorney and discretion invested at such time in the Directors or regularly exercised by them. - 16 - 18 73. Subject to the Companies Law, the Board of Directors may delegate its authorities in whole or in part to committees as it shall deem fit, and it may from time to time revoke such delegation. Any committee so created must, in exercising the authorities granted to it, adhere to all the instructions of the Board of Directors given from time to time and/or to the provisions of the Companies Law. 74. All acts done bona fide at any meeting of the Board of Directors, or of a committee of the Board of Directors or by any person(s) acting as Director(s) shall, notwithstanding that it may afterwards be discovered that there was some defect in the appointment of the participants in such meeting or any of them or any person(s) acting as aforesaid, or that they or any of them or any person(s) acting as aforesaid, or that they or any of them were disqualified, be as valid as if there were no such defect or disqualification. 75. The Board of Directors shall cause proper Minutes to be kept of the following: (a) the names of all the Directors present at any meeting of the Board of Directors and at any meeting of a committee of the Board of Directors; (b) all proceedings and resolutions of General Meetings of the Company, Board of Directors' meetings and Committees of the Board of Directors' meetings. Any Minutes as aforesaid, if purporting to be signed by the Chairman of such meeting or by the Chairman of the next succeeding meeting, shall be accepted as prima facie evidence of the matters therein recorded. 76. [Reserved.] SHAREHOLDERS REGISTERS 77. Subject to, and in accordance with, the provisions of the Companies Law, the Company may cause Shareholder Register to be kept at any place in Israel and may cause a copy of the Shareholder Register to be kept outside Israel as the Board of Directors may think fit and, subject to all applicable legal requirements, the Board of Directors may from time to time adopt such rules and procedures as it may think fit in connection with the keeping of such registers. In addition to the Shareholders Register, the Company shall also keep a Register of Substantial Shareholders as defined in the Companies Law. SECRETARY 78. The Board of Directors may from time to time appoint a Secretary to the Company as it deems fit, and may appoint a temporary Assistant Secretary who shall act as Secretary for the term of his appointment. - 17 - 19 RIGHTS OF SIGNATURE - STAMP AND SEAL 79. (a) Authorization to sign on behalf of the Company and thereby bind it shall be made and granted from time to time by the Board of Directors. The Company shall have at least one rubber stamp. The Company shall be bound by the signature of the aforesaid appointees if appearing together after its stamp or printed name. (b) The Board of Directors may provide for a seal. If the Board of Directors so provides, it shall also provide for the safe custody thereof. Such seal shall not be used except by the authority of the Board of Directors and in the presence of the person(s) authorized to sign on behalf of the Company, who shall sign every instrument to which such seal is affixed. DIVIDENDS 80. Subject to any preferential, deferred, qualified or other rights, privileges or conditions attached to any special class of shares with regard to dividends, the profits of the Company available for dividend and resolved to be distributed shall be applied in payment of dividends upon the shares of the Company in proportion to the amount paid up or credited as paid up per the nominal value thereon respectively. Unless not otherwise specified in the conditions of issuance of the shares, all dividends with respect to shares which were not fully paid up within a certain period, for which dividends were paid, shall be paid proportionally to the amounts paid or credited as paid on the nominal value of the shares during any portion of the abovementioned period. 81. The Board of Directors may declare a dividend to be paid to the shareholders according to their rights and interests in the profits, and may fix the record date for eligibility and the time for payment. 82. The Directors may from time to time pay to the shareholders on account of the next forthcoming dividend such interim dividends as, in their judgment, the position of the Company justifies. 83. A transfer of shares shall not pass the right to any dividend declared thereon after such transfer and before the registration of the transfer. 84. Notice of the declaration of any dividend, whether interim or otherwise, shall be given to the holders of registered shares in the manner hereinafter provided. 85. Unless otherwise directed, any dividend may be paid by check, bank transfer or warrant, sent through the post to the registered address of the shareholder or person entitled or, in the case of joint registered holders, to that one of them first named in the register in respect of the joint holding. Every such check shall be made payable to the order of the person to whom it is sent. The receipt by the person whose name, at the date of the declaration of the dividend, appears in the register of shareholders as the owner of any share or, in the case of joint holders, of any one of such joint holders, shall be a good discharge to the Company of all payments made in respect of such share. All dividends unclaimed for one year after having been declared may be invested or - 18 - 20 otherwise used by the Directors for the benefit of the Company until claimed. No unpaid dividend or interest shall bear interest as against the Company. 86. The Board of Directors may determine that, a dividend may be paid, wholly or partly, by the distribution of specific assets of the Company or by distribution of paid-up shares, debentures or debenture stock or any other securities of the Company or of any other companies or in any one or more of such ways in the manner and to the extent permitted by the Companies Law. PROHIBITED DISTRIBUTION 87. (a) If the Company made a prohibited distribution as defined in the Companies Law, then the shareholder must return to the Company whatever he received, unless he did not know and did not need to know that the distribution carried out was prohibited. (b) It is assumed that a shareholder in the Company, who at the time of the distribution is not a Director, General Manager or controlling member of the Company, did not know and did not need to know that the distribution carried out was a prohibited distribution. 88. If the Company carried out a prohibited distribution, then every person who was a Director at the time of the distribution shall be treated as a person who thereby committed breach of trust against the Company, unless he proved one of the following: (1) that he opposed the prohibited distribution and took all reasonable steps to prevent it; (2) that he exercised reasonable reliance on information under which - had it not been misleading - the distribution would have permitted; (3) that under the circumstances of the case he did not know and did not need to know of the distribution. MERGER 89. A merger requires approval by the Board of Directors and by the General Meeting, in accordance with the provisions of the Companies Law. 90. (a) The Board of Directors of the Company, while considering whether to approve the merger, shall discuss and determine taking the Company's financial situation into account - whether in its opinion there is a reasonable suspicion that in consequence of the merger the merged Company will not be able to meet the Company's obligations to its creditors. (b) If the Board of Directors determined that there is a suspicion as said in Sub-article (a), then it shall not approve the merger. - 19 - 21 91. If each of the Boards of Directors of the merging companies approved the merger, then they shall jointly draw up a proposal for the approval of the merger (hereafter: merger proposal) and sign it. 92. (a) The Company shall deliver the merger proposal to the Companies Registrar within three days after the General Meeting was called. (b) The Company shall inform the Companies Registrar of the General Meetings decision within three days after the decision was adopted, shall inform him that the notice was given to the creditors under Section 318 to the Companies Law, and shall also deliver to the Registrar a copy of the Court decision under Sections 319 to 321 to the Companies Law within three days after the said decision was given. ACCOUNTS 93. The Board of Directors shall cause accurate books of account to be kept in accordance with the provisions of the Companies Law and of any other applicable law. Such books of account shall be kept at the Registered Office of the Company, or at such other place or places as the Board of Directors may think fit, and they shall always be open to inspection by all Directors. No shareholder not being a Director shall have any right to inspect any account or book or other similar document of the Company, except as conferred by law or authorized by the Board of Directors of the Company. 94. At least once in every fiscal year the accounts of the Company shall be audited and the correctness of the profit and loss account and balance sheet certified by one or more duly qualified auditors. 95. The appointment, authorities, rights and duties of the auditor(s) of the Company shall be regulated by the applicable law. NOTICES 96. (a) A notice or any other document may be served by the Company upon any shareholder either personally or by sending it by prepaid mail in Israel (by air mail if sent to a place outside Israel, other than the U.S. or Canada, or by first class mail if sent within the U.S. or Canada) addressed to such shareholder at "his" address as reflected on the Company's Shareholders Register or such other address as he may have designated in writing for the receipt of notices and other documents. Any written notice or other document shall be deemed to have been served forty-eight (48) hours after it has been mailed (seven (7) days if sent to a place or mailed at a place outside of Israel, forty-eight (48) hours if sent within the U.S. or Canada), or when actually received by the addressee if sooner than forty-eight (48) hours or seven (7) days, as the case may be, after it has been mailed, or when actually tendered in person to such shareholder (or to the Secretary or the President of the Company, as the case may be); provided, however, that such notice or other document mentioned above may be sent by facsimile and confirmed by registered mail as aforesaid, and such - 20 - 22 notice shall be deemed to have been given twenty-four (24) hours after such facsimile has been sent or when actually received by such shareholder (or by the Company), whichever is earlier. If a notice is, in fact, received by the addressee, it shall be deemed to have been duly served when received, notwithstanding that it was defectively addressed or failed in some respect to comply with the provisions of this Article. (b) Unless otherwise specified in bearer share warrants, the holders of such warrants shall not be entitled to receive notice of any General Meeting of the Company, and the Company is under no obligation to give notice of General Meetings to a person entitled to a share by virtue of its delivery to him, unless he is duly registered as a shareholder. (c) All notices to be given to the shareholders shall, with respect to any shares to which persons are jointly entitled, be given to whichever of such persons is named first in the Shareholders Register, and any notice so given shall be sufficient notice to the holders of such shares. (d) Any shareholder whose address is not described in the Shareholders Register, and who shall not have designated in writing an address for the receipt of notices, shall not be entitled to receive any notice from the Company. (e) Any notice or other document served upon or sent to any shareholder by publication in accordance with these Articles shall, notwithstanding that he be then deceased or bankrupt, and whether or not the Company has notice of his death or bankruptcy, be deemed to be duly served or sent in respect of any shares held by him (either alone or jointly with others) until some other person is registered in his stead as the holder or joint holder of such shares, and such service or sending shall be a sufficient service on or sending to his heirs, executors, administrators or assigns and all other persons (if any) interested in such share. (f) Where a given number of days' notice, or notice extending over any period, is required to be given, the day of service shall be counted in such number of days or other period. RECONSTRUCTION 97. On any sale of the undertaking of the Company, the Board of Directors or the liquidators on a winding-up may, if authorized by a majority vote at a meeting of shareholders, accept fully paid up shares, debentures or securities of any other company, whether Israeli or foreign, either then existing or to be formed, for the purchase, in whole or in part, of the property of the Company, and the Board of Directors (if the profits of the Company permit), or the liquidators (on a winding-up), may distribute such shares or securities, or any other property of the Company, amongst the shareholders without realization, or vest the same in trustees for them, and the shareholders of the Company at any General Meeting may provide for the distribution or appropriation of the cash, shares or other securities, benefits or property, in accordance with the legal rights of the shareholders or contributors of the Company, and for the valuation of any such securities or property at such price and in such manner as the meeting may approve, and all holders of shares shall be bound to accept and shall be bound by any valuation or distribution so authorized, and waive all rights in relation thereto, save only in the case the Company is proposed - 21 - 23 to be, or is, in the course of being wound up, such statutory rights (if any) under the provisions of the Statutes as are incapable of being varied or excluded by these presents. INDEMNITY AND INSURANCE OF OFFICERS 98. The Company may, to the maximum extent permitted by the Companies Law: (a) enter into a contract for the insurance of the liability, in whole or in part, of any of its Officers, (b) may indemnify an Officer of the Company post factum; and (c) may indemnify an Officer of the Company in advance for the following events: (i) Any financial obligation imposed on an Officer in favor of a third party by a court judgment, including a compromise judgment approved by court (provided that the Company approved the compromise in advance) or an arbitrator's award approved by court (provided that it was given pursuant to arbitration agreed to by the Company in advance), for an act or omission performed by an Officer in his capacity as an Officer.; and (ii) reasonable legal expenses, including attorneys' fees, expended by or charged to an Officer or adjudicated against an Officer by a court in a proceeding commenced against an Officer by the Company or on its behalf or by another person, or in a criminal charge from which an Officer was acquitted, or in a criminal charge that does not require intent, in which an Officer was convicted, all for an act or omission performed in his capacity as an Officer . Such indemnity shall apply in certain forseeable events and up to a feasible amount under the circumstances, as determined by the Board of Directors. (d) Subject to the provisions of the Companies Law, the Company may exculpate an Officer in advance from liability, or any part of liability, for damages sustained by a breach of duty of care to the Company. WINDING-UP 99. If the Company shall be wound up, whether voluntarily or otherwise, the liquidators may, subject to the provision of the Statutes, divide among the shareholders in specie any part of the assets of the Company and may, with like sanction, vest any part of the assets of the Company in trustees upon such trusts, for the benefit of the shareholders, as the liquidators with like sanction shall think fit. BUSINESS COMBINATIONS WITH INTERESTED SHAREHOLDERS - 22 - 24 100. Notwithstanding any other provision of these Articles, the Company shall not engage in any business combination with any interested shareholder for a period of three years following the time that such shareholder became an interested shareholder, unless: (a) prior to such time the Board of Directors of the Company approved either the business combination or the transaction which resulted in the shareholder becoming an interested shareholder, or (b) upon consummation of the transaction which resulted in the shareholder becoming an interested shareholder, the interested shareholder owned at least 75% of the voting shares of the Company outstanding at the time the transaction commenced. As used in this Article only, the term: (1) "affiliate" means a person that directly, or indirectly through one or more intermediaries, controls, is controlled by or is under common control with another person. (2) "associate" when used to indicate a relationship with any person, means (I) any corporation, partnership, unincorporated association or other entity of which such person is a director, officer or partner or is, directly or indirectly, the owner of 25% or more of any class of voting shares, (ii) any trust or other estate in which such person has at least a 20% beneficial interest or as to which such person serves as trustee or in a similar fiduciary capacity, and (iii) any relative or spouse of such person, or any relative of such spouse, who has the same residence as such person. (3) "business combination" when used in reference to the Company and any interested shareholder of the Company, means: (i) any merger or consolidation of the Company or any direct or indirect majority owned subsidiary of the Company with (A) an interested shareholder, or (B) with any other corporation, partnership, unincorporated association or other entity if the merger or consolidation is caused by an interested shareholder and as a result of such merger or consolidation subsection (a) of this Article is not applicable to the surviving entity; (ii) any sale, lease, exchange, mortgage, pledge, transfer or other disposition (in one transaction or a series of transactions), except proportionately as a shareholder of such Company to or with the interested shareholder, whether as part of a dissolution or otherwise, of assets of the Company or of any direct or indirect majority owner subsidiary of the Company, which assets have an aggregate market value equal to 10% or more of either the aggregate market value of all of the assets of the Company - 23 - 25 determined on a consolidated basis or the aggregate market value of all of the outstanding shares of the Company. (iii) any transaction which results in the issuance or transfer by the Company or by any direct or indirect majority-owned subsidiary of the Company of any shares of the Company or of such subsidiary to the interested shareholder, except (A) pursuant to the exercise, exchange or conversion of securities exercisable for or convertible into shares of the Company or any such subsidiary, which securities were outstanding prior to the time that the interested shareholder became such (b) pursuant to a dividend or distribution paid or made, or the exercise, exchange or conversion of securities exercisable for, exchangeable for or convertible into shares of the Company or any such subsidiary, which security is distributed pro rata to all holders of a class or series of shares of the Company subsequent to the time the interested shareholder became such, (C) pursuant to an exchange offer by the Company to purchase shares made on the same terms to all holders of said shares or (D) any issuance or transfer of shares by the Company; provided, that in no case under (B)-(D) above shall there be an increase in the interested shareholder's proportionate share of the shares of any class or series of the Company or of the voting shares of the Company. (iv) any transaction involving the Company or any direct or indirect majority owned subsidiary of the Company which has the effect directly or indirectly of increasing the proportionate share of the shares of any class or series or securities convertible into the shares of any class or series of the Company or of any such subsidiary which is owned by the interested shareholder except as a result of immaterial changes due to fractional share adjustments or as a result of any purchase or redemption of any shares not caused, directly or indirectly, by the interested shareholder; or (v) any receipt by the interested shareholder of the benefit, directly or indirectly (except proportionately as a shareholder of such Company), of any loans, advances, guarantees, pledges or any other financial benefits (other than those expressly permitted in subparagraphs (i)-(iv) above) provided by or through the Company or any direct or indirect majority owned subsidiary. (4) "control" including the term "controlling," "controlled by" and "under common control with," means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a person, whether through the ownership of voting shares, by contract or otherwise. A person who is the owner of 20% or more of the outstanding voting shares of any corporation, partnership, unincorporated association or other entity shall be presumed to have control of such entity. Notwithstanding the foregoing, a presumption of control shall not apply where such person holds voting shares in good faith and not for the purpose of circumventing this Article as an agent, bank, broker, nominee, - 24 - 26 custodian or trustee for one or more owners who do not individually or as a group have control of such entity. (5) "interested shareholder" means any person (other than the Company and any direct or indirect majority owner subsidiary of the Company) that (i) is the owner of 15% or more of the outstanding voting shares of the Company, or (ii) is an affiliate or associate of the Company and was the owner of 15% or more of the outstanding voting shares of the Company at any time within the three year period immediately prior to that date on which it is sought to be determined whether such person is an interested shareholder and the affiliates and associates of such person. For the purpose of determining whether a person is an interested shareholder, the voting shares of the Company deemed to be outstanding shall include shares deemed to be owned by the person through application of paragraph (8) of this subsection but shall not include any other unissued shares of the Company which may be issuable pursuant to any agreement, arrangement or understanding, or upon exercise of conversion rights, warrants or options, or otherwise. (6) "person" means any individual, corporation, partnership, unincorporated association or other entity. (7) "share" means with respect to any corporation shares of its capital and with respect to any other entity any equity interest. (8) "voting shares" means with respect to any corporation shares of any class or series entitled to vote generally in the election of directors and, with respect to any entity that is not a corporation, any equity interest entitled to vote generally in the election of the governing body of such entity. (9) "owner" including the terms "own" and "owned," when used with respect to any share, means a person that individually or with or through any of its affiliates or associates: (i) beneficially owns such share, directly or indirectly; or (ii) has (A) the right to acquire such share (whether such right is exercisable immediately or only after the passage of time) pursuant to any agreement, arrangement or understanding or upon the exercise of conversion rights, warrants or options, or otherwise, provided, however, that a person shall not be deemed the owner of share tendered pursuant to a tender or exchange; or (B) the right to vote such share pursuant to any agreement, arrangement or understanding; provided, however, that a person shall not be deemed the owner of any share because of such person's right to vote such share if the agreement, arrangement, or understanding to vote such share arises solely from a recoverable proxy or consent given in response to a proxy or consent solicitation made to 10 or more persons: or - 25 - 27 (iii) has any agreement, arrangement or understanding for the purpose of acquiring, holding, voting (except voting pursuant to a revocable proxy or consent as described in item (b) of clause (ii) of this paragraph) or disposing of such share with any other person that beneficially owns or whose affiliates or associates beneficially own, directly or indirectly, such share. * * * * * * * * - 26 - EX-99.4.18 3 y50410ex99-4_18.txt SECURITIES PURCHASE AGREEMENT 1 ================================================================================ ----------------------------------------------------------------------- SECURITIES PURCHASE AGREEMENT ----------------------------------------------------------------------- BY AND BETWEEN COMPAGNIE GENERALE DE GEOPHYSIQUE, ON THE ONE HAND, AND PARADIGM GEOPHYSICAL LTD. AND PARADIGM GEOPHYSICAL CORP. ON THE OTHER HAND, WITH RESPECT TO FLAGSHIP S.A. AND FLAGSHIP GEOSCIENCES LLC ----------------------------------------------- Dated: October 4, 2000 ----------------------------------------------- ================================================================================ 2 Table of Contents
Page ARTICLE I INTERPRETATION.................................................................2 1.1 Definitions..........................................................................2 1.2 Construction.........................................................................6 ARTICLE II SALE AND PURCHASE.............................................................7 2.1 Sale and Purchase....................................................................7 2.2 Purchase Consideration...............................................................7 2.3 Adjustment of Purchase Price.........................................................7 2.4 Closing..............................................................................8 2.5 Closing Balance Sheet; Computation of Adjustment Amount..............................9 2.6 Transfer Taxes......................................................................13 ARTICLE III REPRESENTATIONS AND WARRANTIES OF CGG.......................................14 3.1 Representations and Warranties......................................................14 ARTICLE IV REPRESENTATIONS AND WARRANTIES OF THE PURCHASERS.............................23 4.1 Representations and Warranties of the Purchasers....................................23 4.2 Purchasers' Acknowledgment..........................................................27 ARTICLE V COVENANTS OF CGG..............................................................27 5.1 Geovecteur Accounts Receivable......................................................27 5.2 CGG Flagship Accounts Receivable....................................................27 5.3 Covenant Not to Compete.............................................................27 5.4 Lock-up.............................................................................28 5.5 Recommended Third Party Offer.......................................................28 5.6 Retention of Records................................................................29 ARTICLE VI COVENANTS OF PARADIGM........................................................29 6.1 Guaranteed Obligations..............................................................29
3 Table of Contents (continued)
Page 6.2 Retention of Records................................................................30 6.3 Paradigm Board Representation.......................................................30 6.4 Special Preferred Shares............................................................31 ARTICLE VII SURVIVAL AND INDEMNIFICATION................................................31 7.1 Survival of CGG's Representations and Warranties....................................31 7.2 Survival of Purchasers' Representations and Warranties..............................31 7.3 Survival of Covenants...............................................................32 7.4 Indemnification.....................................................................32 7.5 Procedure for Indemnification.......................................................33 7.6 Calculation of Damages..............................................................36 7.7 Additional Rules and Procedures.....................................................37 7.8 Treatment of CGG's Indemnification Payments.........................................38 ARTICLE VIII GENERAL....................................................................39 8.1 Brokers and Finders.................................................................39 8.2 Recourse............................................................................39 8.3 Notice..............................................................................39 8.4 Costs...............................................................................40 8.5 Time of the Essence.................................................................40 8.6 Further Acts........................................................................41 8.7 Arbitration and Governing Law.......................................................41 8.8 Amendment...........................................................................41 8.9 Waiver..............................................................................41 8.10 Entire Agreement...................................................................41 8.11 Severability.......................................................................42 8.12 Counterparts.......................................................................42 8.13 Assignment.........................................................................42 8.14 Benefit............................................................................42
- 2 - 4 SECURITIES PURCHASE AGREEMENT THIS SHARE PURCHASE AGREEMENT, dated October 4, 2000 (as the same may be amended, supplemented or otherwise modified from time to time in accordance with its terms, this "Agreement"), is by and between: - COMPAGNIE GENERALE DE GEOPHYSIQUE, a company incorporated under the laws of France (hereinafter "CGG"), on the one hand; and - PARADIGM GEOPHYSICAL LTD., a company incorporated under the laws of Israel (hereinafter "Paradigm"); and - PARADIGM GEOPHYSICAL CORP., a company incorporated under the laws of Delaware and a wholly-owned Subsidiary of Paradigm (hereinafter "Paradigm USA" and together with Paradigm, the "Purchasers"), on the other hand. RECITALS: WHEREAS: (A) CGG is the registered and beneficial owner of all the shares, nominal value FF 100 per share (the "Shares"), issued by Flagship S.A. a company (societe anonyme) organized under the laws of France ("Flagship SA"); (B) CGG is the beneficial owner, directly or indirectly, of all the outstanding shares of CGG Americas, Inc., a company organized under the laws of the State of Texas ("CGG Americas"), which is in turn the holder of all the membership interests (the "LLC Interests"; and together with the Shares, the "Securities") in Flagship GeoSciences LLC, a limited liability company organized under the laws of the State of Texas ("Flagship LLC"); (C) Flagship SA and Flagship LLC (together, the "Companies" and, individually, a "Company") are engaged in the Flagship Business (as such term is defined below), which business is conducted in certain instances through or with the assistance of certain Affiliates (as such term is defined below) of CGG; (D) Upon the terms herein set forth, the Purchasers wish to purchase the Securities, and CGG is willing to sell the Shares, and to procure that CGG Americas sells the LLC Interests, to the Purchasers; (E) A portion of the consideration to be received by CGG will consist of newly-issued shares in the capital of Paradigm, the offering of which to CGG has taken place outside the United States; (F) Paradigm is organizing Paradigm Geophysical Holdings EURL as a company (entreprise unipersonnelle ' responsabilit' limit'e) for the purpose of acquiring the Shares from Paradigm as soon as practicable after the date hereof; and (G) CGG, Paradigm and the Companies are concurrently herewith entering into certain arrangements with respect to various transitional services to be provided on an on-going basis 5 by the Affiliates of CGG through which a portion of the Flagship Business is being conducted (the "CGG Flagship Affiliates"). NOW, THEREFORE, the parties hereto do hereby agree as follows: ARTICLE I INTERPRETATION 1.1 DEFINITIONS In this Agreement, except as otherwise expressly provided, capitalized words or expressions shall have the meanings set out below: "Affiliate" means, with respect to any Person, any Person which, directly or indirectly, controls, is controlled by, or is under common control with that Person. For purposes of this definition "control" (including, with correlative meaning, the terms "controlled by" and "under common control with"), as used with respect to any Person, shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of such Person, whether through the ownership of voting securities, by contract or otherwise. For the purposes of this Agreement, Flagship SA and Flagship LLC shall not be considered Affiliates of CGG; "Agreed Form" means a form agreed between the parties and for the purposes of identification, initialed by or on behalf of the parties; "Business Day" means a day on which banks are opened for ordinary business in both France and Israel; "CGG Flagship Accounts Receivable" means all accounts receivable of the Companies owed by CGG or any of its Affiliates which (i) have arisen out of the Flagship Business, (ii) are outstanding and unpaid as of September 30, 2000, and (iii) are reflected in the Final Closing Balance Sheet; "Closing Date" or "Date of Closing" means the date of this Agreement; "Company Intellectual Property Right" means any Intellectual Property Right owned or jointly owned by a Company and which relates to the Flagship Business (it being agreed that in the case of copyrights, a copyright shall be deemed to be owned by a Company if it was developed or authored by an employee of the Company and the Company possesses by law the right to exploit such copyright); "Contract" means any contract, agreement, obligation, promise, commitment or other undertaking (written or oral), which is legally binding; "Dollars" or "U.S. Dollars" means dollars of the United States of America; "Eligible Accounting Firm" means an internationally recognized independent accounting firm active in France and the United States; - 2 - 6 "Encumbrance" means any mortgage, lien, pledge, charge, security interest or similar encumbrance; "Excess Geovecteur Liabilities" means any Geovecteur Liabilities exceeding the amount of Geovecteur Liabilities reflected in the Final Closing Balance Sheet; "Flagship Business" means the development, maintenance and commercial sale (i.e., through the granting of licenses) of the Integral Plus, Stratimagic, Seisfacies, GEM, Nexmodel and StratQC software programs whether currently sold or under development, and all activities related thereto; "Geovecteur Accounts Receivable" means all accounts receivable and intercompany receivables of the Companies which (i) have arisen out of the Geovecteur Business, (ii) are outstanding and unpaid as of September 30, 2000, and (iii) are reflected in the Final Closing Balance Sheet; "Geovecteur Business" means the development, maintenance and commercial sale (i.e., through the granting of licenses) by the Companies prior to the date hereof of the Geovecteur and/or the Petrovision software programs; "Geovecteur Liabilities" means any and all liabilities of the Companies which (i) relate directly and primarily to the Geovecteur Business, (ii) are outstanding and unpaid as of September 30, 2000, and (iii) are reflected in the Final Closing Balance Sheet; "Governmental Authority" means any governmental, quasi-governmental or regulatory authority, body, agency or department, whether governmental, provincial, municipal or foreign; "Governmental Authorization" means any approval, consent, permit, ruling, waiver, exemption or other authorization (including the lapse, without objection, of a prescribed time under a statute or regulation that states a transaction may be implemented if a prescribed time lapses following the giving of notice without an objection being made) issued, granted, given or otherwise made available by or under the authority of any Governmental Authority or pursuant to any Law; "Intellectual Property Right" means any of the following: (A) trademarks and service marks (registered or unregistered), trade dress, and all applications and registrations in any jurisdiction pertaining to the foregoing and all goodwill associated therewith; (B) patentable inventions, discoveries, improvements, ideas, know-how, formula methodology, processes, technology, computer programs and software (including, except where otherwise indicated, the Source code and Object code), and all applications and patents in any jurisdiction pertaining to the foregoing; (C) trade secrets, including confidential and other non-public information; (D) copyrights in writings, designs, mask works or other works, and all applications and registrations in any jurisdiction for the foregoing; - 3 - 7 (E) internet web sites, domain names, and all applications and registrations pertaining thereto; (F) licenses, covenants not to sue and similar terms relating to the foregoing; and (G) claims or causes of action arising out of or related to infringement or misappropriation of the foregoing; "Intercompany Payables" means all intercompany payables arising on or prior to September 30, 2000, of (x) CGG or any of its Affiliates to the Companies, and (y) the Companies to CGG or any of its Affiliates (other than (i) the CGG Flagship Accounts Receivable, and (ii) any Geovecteur Accounts Receivable owed by CGG or any of its Affiliates); "Judgment" means any award, decision, injunction, judgment, order, ruling, subpoena, or verdict entered, issued, made or rendered by any court, administrative agency or other Governmental Authority or by any arbitrator; "knowledge of CGG", or words to similar effect, means the actual knowledge of the members of (x) the board of directors (conseil d'administration) and executive committee (comit' ex'cutif) of CGG and (y) the board of directors and executive officers of CGG Americas, in each case, after due inquiry of the persons listed on Schedule 1.1; "Laws" means all applicable national, provincial, municipal, local or foreign laws, statutes, regulations, ordinances, rules, guidelines, orders, directives or other requirements of any Governmental Authority; "Material Adverse Effect" when used with respect to any change, situation, development or other event, means any such change, situation, development or other event which, individually or in the aggregate, has a material adverse effect on the business, financial condition or results of the Companies (taken as a whole) or of Paradigm and its Subsidiaries (taken as a whole), as the case may be, other than those relating to or affecting the economy generally or the business sector in which any of the relevant entities operates; "Net Assets" means Total Assets less Total Current and Long-term Liabilities, determined in accordance with U.S. GAAP, as appearing in the relevant financial statements of the Companies (it being understood that in the case of determination of Total Assets by reference to the Final Closing Balance Sheet, no value shall be reflected therein for any of the assets referenced in Section 3.1.21(A) which were transferred by CGG and its Affiliates to either of the Companies after June 30, 2000); "Ordinary Course of Business" any action taken by the Companies or by Paradigm and its Subsidiaries, as the case may be, shall not be deemed to have been taken in the "Ordinary Course of Business" unless: (A) such action is recurring in nature, is consistent with the Companies' or Paradigm's, as the case may be, past practices, and is taken in the ordinary course of the Companies' or Paradigm's, as the case may be, normal day-to-day operations; and - 4 - 8 (B) such action is not required to be authorized by the stockholders, the board of directors (or any committee thereof) of the Companies or of Paradigm or any of its Subsidiaries, as the case may be, and does not require any other separate or special authorization of any nature; "Organizational Documents" when used with respect to (x) any company or other incorporated entity, means the memorandum and articles of association (statuts), charter or similar constitutive document of such company or other incorporated entity, as filed with the relevant commercial registry, company registrar or other Governmental Authority, as the same may be amended, supplemented or otherwise modified from time to time, and (y) any partnership or other unincorporated entity, means its certificate of formation, partnership agreement, governing agreement and/or similar constitutive document, as the same may be amended, supplemented or otherwise modified from time to time; "Permitted Encumbrances" means (i) any Encumbrances for Taxes or other governmental charges that are not yet delinquent, (ii) any retention of title provisions applicable to any machinery, equipment or inventory purchased by any of the Companies, (iii) any Encumbrances on any of the assets of the Companies arising solely by operation of law, and (iv) any other Encumbrances incurred or arising in the normal course of business which do not materially impair the transferability or the use of the relevant asset; "Person" includes an individual, corporation, partnership, trustee, trust, unincorporated association, organization, syndicate, executor, administrator or other legal or personal representative and pronouns have a similarly extended meaning; "Proceeding" shall mean any action, arbitration, dispute, hearing, investigation, litigation or suit commenced, brought, conducted, or heard by or before any Governmental Authority or arbitrator; "Schedules" means the schedules referenced in the representations and warranties of the parties hereto which schedules have been bound together by notarial process and for the purposes of identification, initialed by or on behalf of the parties; "Social Charge" means all social security, welfare, retirement, unemployment, health, housing, family and similar charges, taxes and payroll-related assessments payable to any Governmental Authority; "Subsidiary" when used with reference to a specified Person, means any company of which shares having ordinary voting power (other than shares having such power only by reason of the happening of a contingency) to elect a majority of the board of directors or other managers of such company are at the time owned, or the management of which is otherwise controlled (as such term is used in the definition of "Affiliate" above), directly or indirectly through one or more intermediaries, or both, by such Person; "Tax" or "Taxation" means all forms of taxation, duty, levy, impost, charge, national insurance or other similar contribution or rates, created or imposed by any Governmental Authority, whether in France or anywhere else, including any payment which a party hereto may be or become bound to make or obliged to account for to any person in respect of Taxation and also including any related penalty, interest, fine or surcharge; and - 5 - 9 "U.S. GAAP" means generally accepted accounting principles in the United States. 1.2 CONSTRUCTION 1.2.1 Headings are for convenience only and do not affect interpretation. 1.2.2 The following rules of interpretation apply unless the context requires otherwise: (A) The singular includes the plural and conversely. (B) A gender includes all genders. (C) Where a word or phrase is defined, its other grammatical forms have a corresponding meaning. (D) A reference to a clause or schedule is to a clause of or schedule to this Agreement. (E) A reference to any party to this Agreement or any other agreement or document includes the party's successors and permitted assigns. (F) A reference to any agreement or document is to that agreement or document as amended, novated, supplemented, varied or replaced from time to time, except to the extent prohibited by this Agreement. (G) A reference to any legislation or to any provision of any legislation includes any modification or re-enactment of it, any legislative provision substituted for it, and all regulations and statutory instruments issued under it. (H) A reference to currency is to U.S. Dollars unless otherwise specifically stated herein. (I) A reference to conduct includes any omission, representation, statement or undertaking, whether or not in writing. (J) A provision in this Agreement will not be construed against a party merely because that party was responsible for the preparation of that provision or because it may have been inserted for that party's benefit. (K) When calculating the period of time within which or following which any act is to be done or step taken, the date which is the reference day in calculating such period shall be excluded. If the last day of such period is not a Business Day, the period shall end on the next Business Day. - 6 - 10 ARTICLE II SALE AND PURCHASE 2.1 SALE AND PURCHASE On the date hereof and upon the terms herein set forth, and in reliance upon the representations, warranties and agreements of the respective parties contained herein, at the Closing (as such term is defined in Section 2.4 below): (A) CGG shall sell, assign and convey to Paradigm, and Paradigm shall purchase and accept from CGG, the Shares; and (B) CGG shall procure that CGG Americas shall sell, assign and convey to Paradigm USA, and Paradigm USA shall purchase and accept from CGG Americas, the LLC Interests; in each such case, free and clear of any Encumbrances. 2.2 PURCHASE CONSIDERATION The aggregate consideration to be paid by the Purchasers for the Securities (the "Base Purchase Price") shall consist of (x) U.S.$4,000,000 in cash, and (y) 1,500,000 newly-issued, fully paid and non-assessable Ordinary Shares of Paradigm, par value NIS 0.5 each (the "Paradigm Shares"). The Base Purchase Price shall be subject to adjustment after the date hereof in accordance with Section 2.3 below. The Base Purchase Price shall be allocated and paid as follows: (A) for the Shares, CGG shall be paid and receive (i) U.S.$3,885,000 in cash, and (ii) the Paradigm Shares; and (B) for the LLC Interests, CGG Americas shall be paid U.S.$115,000 in cash. 2.3 ADJUSTMENT OF PURCHASE PRICE 2.3.1 ADJUSTMENT OF THE BASE PURCHASE PRICE. The Base Purchase Price shall be increased (or decreased) by the U.S. Dollar equivalent of the amount (if any) by which the amount of the Net Assets, as determined on the basis of the Final Closing Balance Sheet (as such term is defined in Section 2.5 below), exceeds (or is less than) FF 16,277,000 (which the parties acknowledge is the amount of the Net Assets determined on the basis of the June Balance Sheet) (the Base Purchase Price, as so adjusted, being referred to herein as the "Purchase Price"). For such purpose, the "U.S. Dollar Equivalent" shall mean the number of U.S. Dollars determined by reference to the US$/Euro rate at the close of business in New York on the date hereof as published by Reuters for transactions of comparable amounts (the French franc figure to be converted into Euros on the basis of the fixed French franc/Euro rate of 6.55957 FF = 1 Euro). 2.3.2 REPAYMENT OF PURCHASE PRICE. The Purchase Price shall be reduced by any amount due to the Purchasers by CGG pursuant to the provisions of Article VII hereof. - 7 - 11 2.4 CLOSING 2.4.1 SIMULTANEOUS SIGNING AND CLOSING. The closing of the sale and purchase of the Securities shall be held at the offices of Willkie Farr & Gallagher, 21-23 rue de la Ville l'Eveque, 75008 Paris, France, immediately upon signature of this Agreement (the "Closing"). 2.4.2 CLOSING MECHANICS. At the Closing: (A) CGG shall cause to be delivered to the Purchasers (in Agreed Form): (i) to Paradigm, a duly signed transfer form (ordre de mouvement) for all the Shares, together with the share registers of Flagship SA; (ii) to Paradigm USA, a duly signed instrument of assignment for all the LLC Interests; (iii) letters of resignation of all the current members of the board of directors of Flagship SA; (iv) Releases signed by CGG and CGG Americas; (v) an approval, by Elf Exploration Production ("Elf EP") in accordance with Article 9 of the contract known as EEP No. 8211 between Elf EP and Petrosystems dated May 1, 1997; (vi) evidence of the removal of Flagship SA from the Amended and Restated Multi-Currency Revolving Credit Agreement dated August 31, 2000; (vii) evidence of amendment of the Organizational Documents of Flagship LLC; (viii) legal opinions of counsel to CGG. (B) the Purchasers shall: (i) pay the Base Purchase Price as follows: (a) the Purchasers shall pay the cash portion of the Base Purchase Price to CGG (for itself and on behalf of CGG Americas) by wire transfer of immediately available funds to such account as previously specified in writing by CGG; and (b) Paradigm shall issue and deliver the Paradigm Shares to CGG, free and clear of any Encumbrances (except as created by this Agreement), and shall cause its transfer agent to deliver to CGG a share certificate representing the Paradigm Shares, and shall deliver to CGG: (x) a copy of the related "Issuance Report Form", as completed and signed, to be filed with the Israeli Registrar of Companies; and (y) a certificate of Paradigm's secretary confirming the inscription of CGG in Paradigm's shareholders register as the owner of the Paradigm Shares; and - 8 - 12 (ii) cause to be delivered to CGG a legal opinion of counsel to the Purchasers (in Agreed Form). (C) CGG and Paradigm and/or the Companies (as appropriate) shall enter into (in Agreed Form): (i) a Registration Rights Agreement (the "Registration Rights Agreement"); (ii) an Umbrella Services Agreement (the "Umbrella Services Agreement"); (iii) an Employee Services Agreement; (iv) two Corporate License Agreements; and (v) a Support Agreement (the "Support Agreement"). All matters at the Closing will be considered to take place simultaneously, and no delivery of any document will be deemed complete until all transactions and deliveries of documents required by this Agreement are completed, and title to the Securities shall not be transferred and the Purchasers shall have no property rights or interest in such Securities unless and until the Closing actually takes place and the payments and deliveries referenced in subsection (B) above are effectively received by the payees thereof. 2.5 CLOSING BALANCE SHEET; COMPUTATION OF ADJUSTMENT AMOUNT 2.5.1 JUNE BALANCE SHEET. The parties acknowledge that: (i) set forth as ANNEX A hereto is a true and complete copy of the unaudited interim combined balance sheet of Flagship SA and Flagship LLC as at June 30, 2000 (the "June Balance Sheet"). (ii) the June Balance Sheet: (a) was prepared in accordance with U.S. GAAP; (b) has been prepared in the course of due diligence review, under the supervision of Ernst & Young, with the knowledge and participation of the senior staff of both Paradigm and CGG; (c) has been reviewed by the parties; and (d) forms the agreed basis for comparison purposes to the Closing Balance Sheet for determining adjustments to the Base Purchase Price, in accordance with Section 2.3.1. 2.5.2 PREPARATION AND DELIVERY OF CLOSING FINANCIAL STATEMENTS. The parties shall use their reasonable endeavors to cause the Companies to prepare, as soon as reasonably practicable and by no later than sixty (60) days after the date hereof, (x) a balance sheet of each of the Companies as at September 30, 2000, together with the related statement of profit - 9 - 13 and loss of each of the Companies for the period ended on such date, and (y) a combined balance sheet of the Companies as at September 30, 2000 (the "Closing Balance Sheet"), together with the related combined statement of profit and loss of the Companies for the period ended on such date, in accordance with U.S. GAAP and in the case of the Closing Balance Sheet, in substantially the same format as the balance sheet included June Financial Statements (collectively, the "Closing Financial Statements"). The Closing Balance Sheet shall reflect all assets and liabilities required to be reflected therein in accordance with U.S. GAAP, except that no value shall be reflected therein for any of the assets referenced in Section 3.1.21(A) which were transferred by CGG and its Affiliates to either of the Companies after June 30, 2000. As soon as reasonably practicable after receipt of the Closing Balance Sheet, CGG shall: (i) procure that Arthur Andersen (the "Appointed Auditors") audit the Closing Financial Statements; and (ii) deliver to the Purchasers: (a) a copy of Closing Financial Statements, as audited by the Appointed Auditors (the "Audited Closing Financial Statements", and the Closing Balance Sheet, as so audited, the "Audited Closing Balance Sheet"), together with a copy of the related audit opinion of the Appointed Auditors; and (b) a certificate (the "Adjustment Certificate"), setting forth in reasonable detail CGG's computation of: (x) the amount of the required adjustment, if any, required by Section 2.3.1 (the "Adjustment Amount"), together with an indication as to which party it shall be paid; and (y) the amount of the Geovecteur Accounts Receivable, the Geovecteur Liabilities and the CGG Flagship Accounts Receivable, in each case, based on the information set forth in the Audited Closing Balance Sheet. The cost of auditing the Closing Financial Statements will be shared equally between Paradigm and CGG. The Purchasers shall ensure that the Appointed Auditors are provided with all reasonable access to the premises of the Companies and to the accounting and other relevant books and records of the Companies as needed in connection with the preparation and audit of the Closing Financial Statements and will provide explanations and assistance to the Appointed Auditors as required. CGG shall ensure that the Appointed Auditors are provided with all reasonable access to the relevant premises of CGG and its Affiliates and to the accounting and other relevant books and records of CGG and its Affiliates as needed in connection with the preparation and audit of the Closing Financial Statements and will provide explanations and assistance to the Appointed Auditors as required. - 10 - 14 2.5.3 REVIEW OF THE AUDITED CLOSING FINANCIAL STATEMENTS. As from the date of the receipt by the Purchasers of the Audited Closing Financial Statements and the Adjustment Certificate (the "Delivery Date"), Paradigm and Ernst & Young (the "Purchasers' Auditors") may proceed at the Purchasers' expense with a review of the Audited Closing Financial Statements and the Adjustment Certificate. Such review shall be finally completed by no later than forty-five (45) days after the Delivery Date. The Purchasers' Auditors shall have all reasonable access to the accounting and other relevant books and records used in the preparation of the Audited Closing Financial Statements and the Adjustment Certificate. 2.5.4 DISPUTED ITEMS NOTICE. The Purchasers may deliver written notice (the "Disputed Items Notice") to CGG within forty-five (45) days after the Delivery Date, stating that the Purchasers object to the Adjustment Amount set forth in the Adjustment Certificate, specifying in reasonable detail the basis for such objections and setting forth the Purchasers' assessment of changes required to be made to the Adjustment Amount (such assessed changes, the "Disputed Items"). Such assessment shall be accompanied by the related report of the Purchasers' Auditors confirming such objections and computations of the Disputed Items. Upon delivery of the Disputed Items Notice, the Purchasers and CGG shall use all reasonable endeavors to meet and discuss the objections of the Purchasers and to resolve the Disputed Items, draw up an agreed adjustments to the Audited Closing Balance Sheet and finally determine the Adjustment Amount (if any), as promptly as practicable. The Purchasers shall procure that the Appointed Auditors are provided with all reasonable access to the premises of the Companies and to the accounting and other relevant books and records of the Companies as needed in connection with their review of the Disputed Items. 2.5.5 DISPUTE RESOLUTION (i) If the Purchasers and CGG do not agree upon the Adjustment Amount (if any) within twenty (20) days after delivery of the Disputed Items Notice (or such longer period as the Purchasers and CGG may agree in writing), the Purchasers and CGG shall each have the right to request that KPMG, PriceWaterHouseCoopers or Deloitte, Touch Tomatsu (the "Independent Expert"), resolve the Disputed Items and make a final determination of the Adjustment Amount (if any), based on its resolution of such Disputed Items; provided, however, that, when so requested, the Independent Expert and any related Entity shall not so act if they are in a position of conflict of interest with any of the parties hereto and the partner in charge of the matter at the selected Independent Expert shall be a qualified US CPA. (ii) The Independent Expert shall be selected jointly by the Appointed Auditors (acting as CGG's agent) and the Purchasers' Auditors (acting as the Purchasers' agent) from among Eligible Accounting Firms. (iii) If the Appointed Auditors and the Purchasers' Auditors have not agreed upon the selection of the Independent Expert within thirty (30) days after notice to the parties from, or a determination by, the selected Independent Expert that it is unwilling or unable to act as the Independent Expert, the Independent Expert shall be appointed by the President of the Courts of Paris (Tribunal de Grande Instance de Paris) acting in summary proceedings (statuant comme en mati're de r'f'r') at the request of the first party to make such request, with each party having the opportunity to be heard, from among Eligible Accounting Firms - 11 - 15 (other than the Appointed Auditors and the Purchasers' Auditors or any other accounting firm which may be in a conflict of interest position with any of the parties hereto). 2.5.6 FINAL DETERMINATION. The Independent Expert shall apply the directives and principles set forth in this Agreement to resolve the Disputed Items as to which CGG and the Purchasers have not agreed and to complete the final determination of the Adjustment Amount (if any). The Independent Expert shall not review any item other than those required to resolve the Disputed Items which CGG has not accepted in writing nor proceed with any further investigations, but shall base its decision exclusively on the materials and arguments presented by the parties and their respective Auditors (which materials shall not include any materials not referred to previously in the preparation of the notices contemplated by this Section 2.5). The parties shall, and the Purchasers shall procure that the Companies shall, cooperate with the Independent Expert in all reasonable respects. The parties shall instruct the Independent Expert to simultaneously deliver to CGG and to the Purchasers a letter (the "Independent Expert's Letter") setting forth its final determination of the Adjustment Amount (which shall in no event be more favorable to the Purchasers than that set forth in the Disputed Items Notice or more favorable to CGG than that set forth in the Adjustment Certificate) within the shortest practicable time and shall use its reasonable efforts to do so within thirty (30) days after its appointment and delivery of all relevant information. Such final determination shall, except in the case of manifest error, be final and binding on the parties hereto, and shall be given by the Independent Expert as an expert and not as an arbitrator. The fees, costs and expenses of the Independent Expert so selected will be borne, in the manner determined by the Independent Expert and if no determination is made, equally between CGG, on the one hand, and the Purchasers, on the other hand. For the purposes hereof, either (i) the definitive Audited Closing Balance Sheet agreed upon by CGG and the Purchasers pursuant to Section 2.5.4 above, or (ii) in the absence of an agreement between CGG and the Purchasers, the Audited Closing Balance Sheet read in light of the Independent Expert's Letter delivered by the Independent Expert pursuant to this Section 2.5.6, is referred to herein as the "Final Closing Balance Sheet". 2.5.7 CONCLUSIVE PRESUMPTIONS (A) If the Purchasers shall not have delivered the Disputed Items Notice (together with the related report of the Purchasers' Auditors) to CGG within forty-five (45) days after the Delivery Date, the Adjustment Amount, if any, set forth in the Adjustment Certificate shall be conclusively presumed to be true and correct in all respects and shall be binding on the parties and may not be disputed by them in any forum. (B) If the Purchasers shall have delivered a Disputed Items Notice (together with the related report of the Purchasers' Auditors) to CGG within forty-five (45) days after the Delivery Date, and if CGG does not notify the Purchasers in writing within ten (10) days after its receipt of the Disputed Items Notice that CGG do not agree with the Purchasers' determination of the Adjustment Amount set forth in the Disputed Items Notice, the Adjustment Amount set forth in the Disputed Items Notice shall be conclusively presumed to be true and correct in all respects and shall be binding on the parties and may not be disputed by them in any forum. - 12 - 16 2.5.8 NOTICE BY PURCHASERS. For the purposes of determining the date of the final determination of the Adjustment Amount pursuant to Sections 2.5.1. through 2.5.7 above, if the Purchasers shall deliver a written notice to CGG at any time after the delivery of the Adjustment Certificate to the effect that they agree with the computation of the Adjustment Amount set forth in the Adjustment Certificate, then the final determination of the Adjustment Amounts shall be deemed to have occurred on the date of the receipt by CGG of such written notice of agreement. 2.5.9 FINAL PAYMENTS. The parties shall (x) settle any amounts due in respect of the Adjustment Amount, and (y) pay or cause to be paid (by the Companies, in the case of the Purchaser, and by its relevant Affiliates, in the case of CGG) any Intercompany Payables reflected in the Final Closing Balance Sheet (to the extent then outstanding), within five (5) Business Days after the final determination of the Adjustment Amount in accordance with the procedures herein set forth. 2.5.10 OTHER FINANCIAL STATEMENTS (A) The parties acknowledge that the Closing Financial Statements are being prepared and audited solely for the purposes of determining the Adjustment Amount and the amount of certain payments to be made in accordance with the terms of this Agreement, and their preparation for the purposes of this Agreement shall not in any respect limit or prejudice the right of the Purchasers to cause the Companies to prepare historical or future periodic financial statements in any other manner or format. (B) The parties further acknowledge that pursuant to the requirements of the U.S. federal securities laws currently applicable to Paradigm, Paradigm may be required to prepare certain pro-forma financial statements for the Companies. In such connection, to assist Paradigm in the preparation of such financial statements, CGG shall provide Paradigm's auditors with all reasonable access to the accounting and other relevant books and records of CGG and its Affiliates as may be reasonably required for the preparation of any such financial statements and will provide explanations and assistance to such auditors to the extent reasonably requested. CGG acknowledges that such financial statements may be filed by Paradigm with various regulatory authorities to which it is subject and become public, and may vary from financial statements and information previously prepared by the Companies. 2.6 TRANSFER TAXES Any transfer or stamp taxes (including any droits d'enregistrement) or similar levies that may become payable as a result of the signing of this Agreement, the transfer of the Securities or the issuance of the Paradigm Shares shall be borne by the Purchasers and shall be paid on a timely basis in compliance with all statutory requirements. - 13 - 17 ARTICLE III REPRESENTATIONS AND WARRANTIES OF CGG 3.1 REPRESENTATIONS AND WARRANTIES CGG makes the following representations and warranties to the Purchasers: 3.1.1 ORGANIZATION AND AUTHORITY OF CGG (A) CGG is a company (societe anonyme) duly incorporated and organized and is validly existing under the Laws of France and has not been dissolved. CGG has the requisite corporate power and authority to enter into this Agreement and to perform its obligations hereunder. The entering into of this Agreement and the performance by CGG of its obligations hereunder have been duly authorized by all necessary action by the board of directors (conseil d'administration) of CGG and no other corporate proceeding on the part of CGG are necessary to authorize CGG's entering into this Agreement or the performance of its obligations hereunder. This Agreement has been duly executed by CGG and, assuming the due authorization and execution of this Agreement by the Purchasers, constitutes a legal, valid and binding obligation of CGG, enforceable against it in accordance with its terms. (B) CGG Americas is a corporation duly incorporated and organized and is validly existing under the Laws of the State of Texas and has not been dissolved. CGG Americas has the requisite corporate power and authority to sell the LLC Interests on the terms herein contemplated. The sale of the LLC Interests on the terms contemplated by this Agreement has been duly authorized by all necessary action by the board of directors of CGG Americas and no other corporate proceeding on the part of CGG Americas are necessary to authorize the sale of the LLC Interests on the terms contemplated by this Agreement. 3.1.2 CORPORATE MATTERS (A) Flagship SA is a company (soci't'anonyme) duly incorporated and validly existing under the Laws of France and has not been dissolved. Schedule 3.1.2(A) sets forth a true, accurate and complete copy of the Organizational Documents of Flagship SA. On September 20, 1999, Flagship SA changed its name from Petrosystems SA. to its current name. Flagship SA has all requisite corporate power and authority to conduct its business as it is now being conducted and to own or use the properties and assets that it currently purports to own or use. (B) Flagship LLC is a limited liability company duly incorporated and validly existing under the laws of Texas. Schedule 3.1.2(B) sets forth a true, accurate and complete copy of the Organizational Documents of Flagship LLC. Flagship LLC has all requisite corporate power and authority to conduct its business as it is now being conducted and to own or use the properties and assets that it currently purports to own or use. (C) The registered share capital of Flagship SA is FF 250,000 divided into 2,500 ordinary shares of nominal value FF 100 each. The Shares are the only shares outstanding and are held beneficially and of record by CGG, free and clear of any Encumbrances. - 14 - 18 (D) The entire membership interest in the LLC is represented by 300,000 "Class A Voting Units" and 7,937,000 "Class B Voting Units", all of which are held by CGG Americas, free and clear of any Encumbrances. (E) The Companies have no Subsidiaries and do not hold securities or investments in any company, organization (whether incorporated or not) or any other entity (other than any liquid securities held for cash management purposes). (F) There are no rights or agreements to subscribe for, or to purchase, any shares or other securities of the Companies, nor are there outstanding any warrants, options, convertible instruments, or any other rights, agreements, undertakings, promises or commitments, written or oral, to sell or acquire shares from the Companies. 3.1.3 NO CONFLICT OR VIOLATION Neither the execution and delivery of this Agreement by CGG, nor the consummation of the transactions contemplated hereby nor the fulfillment by CGG of the terms, conditions and provisions hereof will (with or without the giving of notice or lapse of time, or both): (A) contravene or violate the Organizational Documents or any resolutions of CGG, CGG Americas or either of the Companies or any amendments thereto or restatements thereof; (B) contravene or violate any Laws or Judgments applicable to CGG, CGG Americas or either of the Companies or require any Governmental Authorizations (other than filings to be made after the Closing under the provisions of the U.S. Securities Exchange Act of 1934, as amended (the "Exchange Act") and the French securities laws). (C) contravene, violate or result in the breach of, or give any other party the right to declare a default under, accelerate the performance of, or cancel, modify or terminate its obligations under, any material Contract to which either of the Companies is a party or by which it is bound; or (D) result in the creation or imposition of any Encumbrance on any of the assets of the Companies. 3.1.4 FINANCIAL STATEMENTS (A) The June Balance Sheet was prepared in accordance with U.S. GAAP on the basis of the financial records of the Companies, and in all material respects fairly presents the combined financial position of Flagship SA and Flagship LLC as at June 30, 2000, subject to normal audit adjustments. (B) Since June 30, 2000, there has been no material adverse change in the business, financial condition or results of the Companies, taken as a whole. (C) Except as disclosed in this Agreement, since June 30, 2000, each of the Companies has conducted its operations in all material respects in the Ordinary Course of Business. - 15 - 19 3.1.5 TAXES (A) Except as disclosed on Schedule 3.1.5: (i) all returns, reports and declarations in respect of any Taxes ("Tax Returns") that were required to be filed by or on behalf of either of the Companies (either separately or as part of a consolidated group) on or before the date hereof have properly and timely filed with the appropriate Governmental Authorities, and each such Tax Return was complete and correct in all material respects; (ii) all Taxes required to be paid by either of the Companies on account of any period up to September 30, 2000, have either been paid or will be fully reflected as a liability and reserved against in the Final Closing Balance Sheet; and (iii) no claim for assessment or collection of Taxes relating to either of the Companies that is or may become payable by either any of them has been notified in writing to the Companies or to CGG by any Governmental Authority, and neither CGG nor either of the Companies has caused the period for assessment or collection of any Taxes for which either of the Companies may be liable to be extended. (B) Schedule 3.1.5 sets forth the notifications received by CGG or the Companies in respect of the most recent years for which the Tax Return pertaining to income Taxes (impots sur les societes or the equivalent in jurisdictions other than France) owed by or on behalf of each of the Companies has been audited by the relevant Tax authorities. (C) Without derogating from the representations and warranties contained in this Article III, the Purchasers acknowledge that Flagship SA has opted previously for tax consolidation with CGG as the parent company of the tax consolidated group, and that Flagship SA will leave such group as a result of the transactions contemplated hereby. (D) No election pursuant to U.S. Treasury Regulation 301.7701-3(c) has been filed by Flagship LLC. 3.1.6 PROPERTY AND ASSETS (A) Neither of the Companies owns any real property or is bound under any agreement to purchase any real property. (B) Schedule 3.1.6(B) sets forth an accurate and complete list of all real properties leased by either of the Companies (the "Leased Real Properties"). (C) Except as set forth in Schedule 3.1.6(C), each of the Companies owns or has a valid lease for all material items of machinery, equipment and other tangible personal property which are required in order to conduct the Flagship Business as presently conducted. All such items which are material to the respective businesses of the Companies are in good condition, repair and (where applicable) proper working order, having due regard to the use and age thereof, reasonable wear and tear excepted. Each of the Companies has good and marketable title to each such material item of machinery, equipment and other tangible personal property purported to be owned by it, free and clear of any Encumbrances other than Permitted Encumbrances. - 16 - 20 3.1.7 MATERIAL CONTRACTS. Schedule 3.1.7 sets forth a complete and accurate list of all the following Contracts (other than any such Contracts identified in other Schedules) in effect to which either of the Companies is a party and under which such Company has any material obligations or liabilities continuing as of the date hereof (including, in the case of (B), and as far as it relates to the Flagship Business, any Contracts to which CGG or a CGG Flagship Affiliate is a party and under which such CGG Flagship Affiliate has any material obligations or liabilities continuing as of the date hereof) : (A) loan agreements, security agreements and other written arrangements relating to the borrowing of money or for lines of credit (other than intercompany loans and indebtedness); (B) agreements and other arrangements with customers providing for (x) the installation, configuration and maintenance during standard warranty periods of any computer software products licensed to third parties ("Licensing Agreements"), or (y) the servicing or maintenance of any computer software products licensed to a third party pursuant to a Licensing Agreement following the expiration of the standard warranty period (it being agreed that a Contract shall be deemed to be a Licensing Agreement hereunder only if a Company has any continuing obligations thereunder to deliver, install, configure or maintain during standard warranty periods any computer software products licensed to third parties); (C) agreements and other arrangements for the sale of any assets or properties (other than inventory) and for a sale price in excess of US$ 100,000 in any one case or for the grant of any options or preferential rights to purchase any assets (other than inventory); (D) guarantees or similar written arrangements pursuant to which either of the Companies guarantees the obligations of any third party; (E) contracts or commitments restricting either of the Companies from engaging in or competing in any line of business or with any other Person; (F) partnership or joint venture agreements; (G) lease agreements in respect of the Leased Real Properties; (H) research and development agreements; (I) distribution agreements; (J) agreements with Governmental Authorities; (K) agency agreements; and (L) any other contract or agreement material to the businesses of the Companies (taken as a whole) made other than in the Ordinary Course of Business pursuant to which annual payments in excess of US$ 100,000 may reasonably be expected to be made by or to the Companies; - 17 - 21 (the foregoing Contracts being referred to collectively as the "Material Contracts" and individually as a "Material Contract"). Except as disclosed in Schedule 3.1.7, none of the Material Contracts by its terms entitles the counterparty to terminate, or to modify or accelerate any obligations or rights under, such Material Contract solely by reason of a change of control of either of the Companies, and neither CGG nor either of the Companies has received or given written notice that a Company or any co-contractant is in material default under any Material Contract, which default remains unremedied as at the date hereof. 3.1.8 INTELLECTUAL PROPERTY (A) Schedule 3.1.8(A)(I) identifies the Company Intellectual Property Rights, which is registered with any Governmental Authority or for which an application has been filed with a Governmental Authority. Schedule 3.1.8(A)(II) identifies all other Company Intellectual Property Rights, excluding trade secrets. Schedule 3.1.8(A)(III) identifies each Intellectual Property Right licensed to either of the Companies by any Person (except for any Intellectual Property Right that is licensed to either of the Companies under any third party license generally available to the public at a cost of less than US$ 25,000), and includes a copy of the license agreement under which such Intellectual Property Right is being licensed to the relevant Company (the "Licensed Intellectual Property Rights"). Except as disclosed in Schedule 3.1.8(A)(I) or (II), the Companies are the sole and exclusive owners of all of the Company Intellectual Property Rights identified in such Schedules, free and clear of all Encumbrances (it being agreed that any licenses granted to third parties for the non-exclusive use of any Company Intellectual Property Rights shall not be deemed to constitute Encumbrances), and has a valid right to use all Intellectual Property Rights identified in Schedule 3.1.8(A)(III). Except as disclosed in Schedule 3.1.8(A)(I) or (II), neither of the Companies is obligated to make any payment to any Person for the use of any Company Intellectual Property Right. Except as disclosed on Schedule 3.1.8(A)(I) or (II), neither of the Companies has developed jointly with any other Person any Company Intellectual Property Right with respect to which such other Person has any material rights. The Company Intellectual Property Rights and, to the knowledge of CGG, the Licensed Intellectual Property Rights are subsisting, valid and enforceable and have not been adjudged invalid or unenforceable in whole or in part. (B) The Companies have taken all reasonable measures and precautions necessary to protect and maintain the confidentiality and secrecy of all Company Intellectual Property Rights (except Company Intellectual Property Rights whose value would not be materially impaired by public disclosure) and otherwise to maintain and protect the value of all Company Intellectual Property Rights. The Companies have not (other than (x) as disclosed on Schedule 3.1.8(B), (y) pursuant to a Licensing Agreement identified in Schedule 3.1.7(B) or (z) otherwise under a customary license, escrow, maintenance, support, non-disclosure, research and development or similar agreement in the Ordinary Course of Business) disclosed or delivered to any third party, or permitted the disclosure or delivery to any third party, of (i) the source code, or any portion or aspect of the source code, of any Company Intellectual Property Right, (ii) the object code, or any portion or aspect of the object code, of any Company Intellectual Property Right, or (iii) any trade or financial secrets or confidential lists of customers. (C) All software applications and software assets are properly documented and include all the required related documentation and user manuals, API manuals, information - 18 - 22 relating to the software programs, printed listings of code, detailed description of all libraries and software and any patches, bug fixes, workarounds and upgrades. (D) To the knowledge of CGG, none of the Company Intellectual Property Rights infringes or conflicts with any Intellectual Property Rights owned, used or claimed by any other Person. To the knowledge of CGG, the Companies are not infringing, misappropriating or making any unlawful use of, and the Companies have not at any time infringed, misappropriated or made any unlawful use of, or received any notice or other communication (in writing or otherwise) of any actual, alleged, possible or potential infringement, misappropriation or unlawful use of, any Intellectual Property Right owned, used or claimed by any other Person. To the knowledge of CGG, no other Person is infringing, misappropriating or making any unlawful use of, and no Intellectual Property Right owned or used by any other Person infringes or conflicts with, any Company Intellectual Property Right. (E) The Company Intellectual Property Rights and the Licensed Intellectual Property Rights collectively constitute all the Intellectual Property Rights reasonably required to enable the Companies to conduct the Flagship Business as presently conducted. 3.1.9 INSURANCE. The insurance policies insuring the properties, assets and operations of the Companies through the Closing were provided primarily through CGG and its Affiliates and with respect to the Companies such group coverage will terminate as at the Closing. Schedule 3.1.9 provides a list of the material insurance policies maintained by or for the benefit of the Companies and in effect immediately prior to the Closing. To the extent that with respect to the Companies, any of such policies provide coverage after the date hereof in relation to events occurring or periods prior to the date hereof, upon the request of a Company, CGG shall use its reasonable commercial endeavors to obtain indemnification under such policies for (and shall pay the obtained indemnification to) the relevant Company (net of any costs to CGG or any of its Affiliates). 3.1.10 RECORDS. The books of account, share transfer and account records, minute books and similar records of the Companies have been duly maintained in all material respects in accordance with all applicable legal requirements and contain sufficient records of all matters required to be dealt with in such records and are in the possession of the Companies. All material financial transactions relating to the Companies have been recorded in the books and records of the Companies to the extent required by, and in accordance with, applicable generally accepted accounting principles and are in the possession of the Companies. 3.1.11 CUSTOMER LISTS. Neither CGG nor, to the knowledge of CGG, any previous shareholders or directors or any of their respective Affiliates is in possession of a copy of the current customer lists developed and used by the Companies in their respective businesses or the electronic data or other means to generate a copy of any such lists after the date hereof (it being understood and agreed that in relation to their own businesses, CGG and its Affiliates may have customers in common with the Companies and may therefore have substantially identical customer lists). 3.1.12 COMPUTER SYSTEMS. Except as disclosed on Schedule 3.1.12: (i) the Companies own, license or have the right to use all of the computer systems reasonably - 19 - 23 required for the ongoing operation and conduct of their businesses as presently conducted; (ii) the computer systems of the Companies, including, but not limited to, mainframes, mini-computers and special purpose systems, are in reasonable operating condition and have adequate documentation describing, among other things, the operation of the hardware, required maintenance required operational procedures, all operating systems, applications and utilities; (iii) the documentation matches the implementation of the hardware and software in use as of the date hereof; and (iv) all installed software is fully licensed for use by the Companies. 3.1.13 BANK ACCOUNTS. Schedule 3.1.13 sets out a list of all bank accounts opened in the name of either of the Companies, and the names of each person authorized to operate each such account. 3.1.14 COMPLIANCE WITH LAWS. The Companies have complied with all applicable Laws and Judgments except where the failure to so comply could not reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect. Neither of the Companies has received written notice which remains outstanding of any material violation of any such Law or of any default with respect to any Judgment applicable to the Companies or any of their respective assets, properties or operations. The Companies have all material Governmental Authorizations required for the conduct of their respective businesses as presently conducted, and all such Governmental Authorizations are in full force and effect, except where failure to obtain or maintain any such Governmental Authorizations could not reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect. 3.1.15 LITIGATION. There is no Proceeding pending or, to the knowledge of CGG, threatened in writing against (x) the Companies or (y) CGG or any of its Affiliates in relation to the Flagship Business. There is not presently any Judgment outstanding against the Companies which has not been satisfied or complied with in full. To the knowledge of CGG, there is no basis for a claim against the Companies which is reasonably likely to be asserted and which could reasonably be expected to have a Material Adverse Effect on the Companies. 3.1.16 CONTRACTS WITH CERTAIN RELATED PARTIES. Except as disclosed in Schedule 3.1.16, neither of the Companies is a party to any material Contract in which any director, or to the knowledge of CGG, any former director, shareholder, officer or former officer of CGG or the Companies, or any family member thereof, has a material interest, directly or indirectly, including arrangements for the payment of management or consulting fees of any kind whatsoever. 3.1.17 ENVIRONMENTAL LIABILITIES (A) (a) The Companies are in material compliance with all applicable Laws relating to the pollution or the protection of the environment ("Environmental Laws") except where failure to so comply could not reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect; (b) CGG and, to the knowledge of CGG, the Companies have not received any written communication that alleges that the Companies are not in material compliance with all applicable Environmental Laws; (c) the Companies have all material Governmental Authorizations required to be obtained by them pursuant to Environmental Laws (the "Environmental Permits") for the conduct of their respective - 20 - 24 businesses as presently conducted, and all such Environmental Permits are in full force and effect, except where failure to obtain or maintain any such Environmental Permit could not reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect. (B) There is no claim or Proceeding based on an alleged violation of the Environmental Laws (an "Environmental Claim") pending or, to the knowledge of CGG, threatened in writing against or involving the Companies or against any person or entity whose liability for any Environmental Claim the Companies have retained or assumed either contractually or by operation of law which could reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect. (C) No work, repair or capital expenditure is planned nor, to the knowledge of CGG, is any work, repair or capital expenditure required in respect of the properties and assets (including real property) of the Companies pursuant to or to comply with any Environmental Law, where the failure to undertake such work, repair or capital expenditure could reasonably be expected to result in an Environmental Claim having a Material Adverse Effect. 3.1.18 EMPLOYMENT AND LABOR MATTERS (A) Schedule 3.1.18(A) sets forth (a) an accurate and complete list of all the directors of Flagship SA and all the managers of Flagship LLC, and (b) an accurate and complete list of the collective bargaining agreements (conventions collectives and accords d'entreprise or their equivalent in jurisdictions other than France) applicable to any of the Companies' employees. (B) Schedule 3.1.18(B) sets forth: (i) a complete list of the names of the employees of each of the Companies on the date hereof, and (ii) the salary, benefits and other compensation payable to each such employee, together with a copy of any written employment agreement with any of such employees. (C) Since December 30, 1999, except to the extent disclosed in Schedule 3.1.18(C), neither of the Companies has (a) paid or agreed to pay any bonuses or made or agreed to make any increase in the rate of wages, salaries or other remuneration of any of its employees generally other than in the Ordinary Course of Business or as dictated by applicable Law or the applicable collective bargaining agreement, or (b) changed its hiring or termination policies or practices in any material respect. (D) Except as disclosed on Schedule 3.1.18(D), there are no severance or similar undertakings providing for compensation in case of termination of employment and no pensions or retirement benefits, bonus, profit sharing, stock purchase or stock option plans, company saving plans or employee funds or similar employee benefit plans or arrangements (such plans, funds or arrangements, the "Benefit Plans") sponsored or maintained by either of the Companies and providing benefits of economic value to employees which (x) in the case of Flagship SA, provide for any individual or collective terms and conditions of employment that are, in any material respect, more favorable to employees than the applicable collective bargaining agreement or the applicable requirements of Law, or (y) in the case of Flagship LLC, which provide for any individual or collective terms and conditions of employment that are, in any material respect, more favorable to employees than either (a) the applicable collective - 21 - 25 bargaining agreement or the applicable requirements of Law, or (b) if no such agreement or legal requirements apply, than such terms and conditions as are reasonably customary for employees of similarly situated companies carrying on similar businesses. (E) CGG has made (or has caused the Companies to make) such notifications to and effected such consultations with, the workers councils (comites d'entreprise) or equivalent bodies of the Companies as are required by applicable Law in connection with the sale of the Securities contemplated hereby. 3.1.19 ACCOUNTS RECEIVABLE. All accounts receivable reflected in the Final Closing Balance Sheet will represent valid obligations, and, to the knowledge of CGG, will be collectible (subject to diligent prosecution of deliquent payors and net of reserves for doubtful accounts included in the Final Closing Balance Sheet) for their full value in the Ordinary Course of Business of the Companies (it being understood and agreed that the foregoing warranty does not apply to the CGG Flagship Accounts Receivable or to the Geovecteur Accounts Receivable). 3.1.20 FSH. Schedule 3.1.20 sets forth a description of the Companies obligations to FSH. 3.1.21 MATTERS PERTAINING TO CGG AND ITS AFFILIATES (A) Set forth on Schedule 3.1.21(A) is a copy of the documentation pursuant to which CGG and its Affiliates have conveyed to the Companies, prior to September 30, 2000, all material items of tangible personal property used directly in the Flagship Business which were owned by CGG or one of its Affiliates as of June 30, 2000. (B) Set forth on Schedule 3.1.21(B) is a copy of the documentation pursuant to which CGG Canada has assigned to Flagship SA, prior to September 30, 2000, all of its right, title and interest to Nexmodel and the other rights acquired by CGG Canada from Geonexus Corp. under an agreement dated July 29, 1998. (C) Set forth on Schedule 3.1.21(C) is a copy of the documentation pursuant to which CGG and its Affiliates have purchased from the Companies, prior to September 30, 2000, all material items of tangible personal property used directly in the Geovecteur Business which were owned by the Companies as of June 30, 2000 and reflected in the June Financial Statements. (D) Except as contemplated by this Agreement or by the Umbrella Services Agreement or as disclosed on Schedule 3.1.21(D), after the Closing, neither CGG (or any of its Affiliates) nor either of the Companies will be bound by any contractual obligation or commitment in favor of, respectively, the Companies or CGG (or any of its Affiliates). (E) All Intercompany Payables identified with reasonable certainty as to their amount by CGG as of September 25, 2000 have been settled in full on or prior to September 30, 2000 (other than amounts relating to corporate tax advance payments previously made by Flagship SA to CGG), and no material amount of Intercompany Payables have been incurred since September 25, 2000. - 22 - 26 (F) Since June 30, 2000, no professional fees or expenses (including legal and accounting fees) relating to the sale of the Securities have been invoiced to either of the Companies. 3.1.22 DISCLOSURE. To the knowledge of CGG, there is no fact or facts peculiar to the Companies which CGG has not disclosed to Paradigm in writing which could reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect. 3.1.23 SECURITIES ACT MATTERS. CGG is acquiring the Paradigm Shares for its own account, for investment purposes only, and not with a view to the resale or distribution of any part thereof in violation of any applicable securities law. CGG understands that the Paradigm Shares have not been registered under the U.S. Securities Act of 1933, as amended (the "Securities Act"), or under the securities laws of the various states of the United States, by reason of an exemption from the registration provisions thereunder. CGG acknowledges that its representations and warranties contained in this Section are being relied upon by Paradigm as a basis for the exemption of the issuance of the Paradigm Shares hereunder from the registration requirements of the Securities Act and any applicable state securities laws. CGG understands that all certificates for the Paradigm Shares issued to CGG shall bear a legend in substantially the following form: "THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. THE SECURITIES MAY NOT BE OFFERED, SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF WITHOUT SUCH REGISTRATION OR THE DELIVERY TO THE ISSUER OF AN OPINION OF COUNSEL, REASONABLY ACCEPTABLE TO THE ISSUER, OR OTHER EVIDENCE REASONABLY ACCEPTABLE TO THE ISSUER, THAT SUCH DISPOSITION WILL NOT REQUIRE REGISTRATION OF SUCH SECURITIES UNDER THE SECURITIES ACT OF 1933, AS AMENDED." ARTICLE IV REPRESENTATIONS AND WARRANTIES OF THE PURCHASERS 4.1 REPRESENTATIONS AND WARRANTIES OF THE PURCHASERS The Purchasers make the following representations and warranties to CGG: 4.1.1 ORGANIZATION AND AUTHORITY OF THE PURCHASERS. (A) Paradigm is a company duly incorporated and organized and is validly existing under the Laws of the State of Israel and has not been dissolved. Schedule 4.1.1 sets forth a true, accurate and complete copy of the Organizational Documents of Paradigm. Paradigm has the requisite corporate power and authority to enter into this Agreement and the Registration Rights Agreement and to perform its obligations hereunder and thereunder. The entering into of this Agreement and the Registration Rights Agreement and the performance by Paradigm of its obligations hereunder and thereunder have been duly authorized by all necessary action by the board of directors of Paradigm and no other corporate proceeding on - 23 - 27 the part of Paradigm are necessary to authorize Paradigm's entering into this Agreement or the Registration Rights Agreement or the performance of its obligations hereunder or thereunder, including the issuance to CGG of the Paradigm Shares. This Agreement and the Registration Rights Agreement have been duly executed by Paradigm and, assuming the due authorization and execution of this Agreement and the Registration Rights Agreement by CGG, constitute the legal, valid and binding obligations of Paradigm, enforceable against it in accordance with their respective terms. (B) Paradigm USA is a corporation duly incorporated and organized and is validly existing under the Laws of Delaware and has not been dissolved. Paradigm USA has the requisite corporate power and authority to enter into this Agreement and to perform its obligations hereunder. The entering into of this Agreement and the performance by Paradigm USA of its obligations hereunder have been duly authorized by all necessary action by the board of directors of Paradigm USA and no other corporate proceeding on the part of Paradigm USA are necessary to authorize Paradigm USA's entering into this Agreement or the performance of its obligations hereunder. This Agreement has been duly executed by Paradigm USA and, assuming the due authorization and execution of this Agreement by CGG, constitutes a legal, valid and binding obligation of Paradigm USA, enforceable against it in accordance with its terms. 4.1.2 NO CONFLICT OR VIOLATION. Neither the execution and delivery of this Agreement and the Registration Rights Agreement by the relevant Purchasers, nor the consummation of the transactions contemplated hereby or thereby nor the fulfillment by the relevant Purchasers of the terms, conditions and provisions hereof and thereof will (with or without the giving of notice or lapse of time, or both): (A) contravene or violate the Organizational Documents or any resolutions of any of the Purchasers or any amendments thereto or restatements thereof; (B) contravene or violate any Laws or Judgments applicable to any of the Purchasers or require any Governmental Authorizations (other than filings to be made after the Closing under the provisions of the Exchange Act, as amended and with the Israeli Registrar of Companies); (C) contravene, violate or result in the breach of, or give any other party the right to declare a default under, accelerate the performance of, or cancel, modify or terminate its obligations under, any material Contract to which any of the Purchasers is a party or by which it is bound; or (D) result in the creation or imposition of any Encumbrance on any of the assets of any of the Purchasers. 4.1.3 ISSUANCE OF PARADIGM SHARES. The Paradigm Shares to be sold and issued to CGG in accordance with the terms of this Agreement have been duly authorized and, when issued as contemplated hereby, will be validly issued in compliance with all applicable Laws, fully paid and non-assessable, and no other Person has any preemptive right, option, warrant, subscription agreement or other right with respect to such Shares. Upon the issuance of the Paradigm Shares, CGG will acquire good and marketable title to the Paradigm Shares free - 24 - 28 and clear of any and all Encumbrances, except such Encumbrances as may be created pursuant to this Agreement or by CGG. 4.1.4 COMMISSION REPORTS. Paradigm has filed with the United States Securities and Exchange Commission (the "Commission") all forms, reports, filings, proxy materials, registration statements and other documents required to be filed by it under the U.S. federal securities laws (the "Commission Filings"). The Commission Filings (as of their respective filing dates, mailing dates or effective dates, as the case may be) complied in all material respects with the applicable requirements of the U.S. federal securities laws and did not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements made therein, in light of the circumstances under which they were made, not misleading. Each of the consolidated balance sheets (including the related notes) included in the Commission Filings fairly presents in all material respects the financial position of Paradigm and its consolidated Subsidiaries as of the respective date thereof, and each of the other related statements (including the related notes) included therein fairly presents in all material respects the results of operations and cash flows of Paradigm and its consolidated Subsidiaries for the respective period or as of the respective date set forth therein. Each of the consolidated balance sheets and statements of operations and cash flows (including the related notes) included in the Commission Filings has been prepared in accordance with generally accepted accounting principles applied on a consistent basis during the period involved, except as otherwise noted therein, and subject, in the case of unaudited interim financial statements, to normal year-end adjustments. Paradigm has fully complied in all material respects with the Israeli Securities Law of 1968 and with the applicable term of any exemption granted thereunder. Paradigm acknowledges that CGG is relying on the Commission Filings with respect to its purchase of the Paradigm Shares pursuant to this Agreement. Since June 30, 2000, there has been no material adverse change in the business, financial condition or results of Paradigm and its Subsidiaries, taken as a whole, other than changes prevailing in the business sector in which Paradigm operates, and Paradigm and its Subsidiaries have not entered into any material transactions (other than in the Ordinary Course of Business) other than as reflected in the Commission Filings. 4.1.5 LISTING OF ORDINARY SHARES. The outstanding Ordinary Shares of Paradigm are listed on the Nasdaq National Market, and Paradigm's listing agreement with respect thereto is in full force and effect. No action has been taken or threatened by Nasdaq with respect to the delisting or suspension from trading of the Ordinary Shares. The Paradigm Shares to be issued to CGG have been approved for listing on the Nasdaq National Market (subject to notice of issuance). 4.1.6 FOREIGN PRIVATE ISSUER. Paradigm is a "foreign private issuer," as defined in Rule 3b-4 of the Exchange Act. 4.1.7 SHARE CAPITAL. The authorized share capital of Paradigm consists in its entirety of 18,000,000 Ordinary Shares, of which, as of August 30, 2000, 13,191,902 are issued and outstanding and 2,000,000 Special Preferred Shares, none of which are issued and outstanding. In addition, as of August 30, 2000 (a) an aggregate of 2,239,814 Ordinary Shares are reserved for issuance pursuant to Paradigm's 1994 Stock Option Plan for key employees, the May 1994 Stock Option Plan, the 1994 General Stock Option Plan, the 1997 Stock Option Plan for Qualifying Israel Employees, the 1997 Executive Stock Option Plan - 25 - 29 and the 1997 Stock Option Plan for U.S. Employees (collectively, the "1994 and 1997 Stock Option Plans"), of which options to purchase 1,891,406 Ordinary Shares were outstanding as of August 30, 2000; and (b) 612,861 Ordinary Shares are reserved for issuance in connection with the exercise of certain outstanding warrants. All of the above outstanding shares have been duly authorized and validly issued, are fully paid and non-assessable, are not subject to preemptive rights, and are owned by Paradigm's shareholders free and clear of any Encumbrances imposed or created by Paradigm. Except as set forth in Schedule 4.1.7, none of the outstanding capital shares of Paradigm are subject to any co-sale right, registration right, right of first refusal or other similar right to purchase any shares pursuant to any agreement to which Paradigm is a party or otherwise imposed or created by Paradigm or imposed by Israeli law. Other than as described above, there are no outstanding options, warrants or other rights calling for the issuance of, and no commitments, plans or arrangements to issue, any capital shares of Paradigm or any security convertible into or exchangeable for share capital of Paradigm. All shares to be issued upon the exercise of outstanding warrants or options or upon the conversion of any security shall be, when issued or sold in accordance with the terms of the applicable agreements, validly issued, fully paid and non-assessable. An "Initial Public Offering", as such term is used in Paradigm's Articles of Association, has occurred. 4.1.8 LITIGATION. Except as disclosed in Commission Filings, there is no claim or Proceeding pending or, to the knowledge of Paradigm, threatened in writing against or affecting Paradigm or any of its Subsidiaries or the assets of any of them which could have, individually or in the aggregate, a Material Adverse Effect on Paradigm and its Subsidiaries (taken as a whole), or a material adverse effect on Paradigm's ability to perform or observe any obligation or condition under this Agreement. To the knowledge of Paradigm, there is no basis for a claim against Paradigm or any of its Subsidiaries which is reasonably likely to be asserted and which could reasonably be expected to have a Material Adverse Effect on Paradigm and its Subsidiaries (taken as a whole). 4.1.9 INDUSTRIAL COMPANY. Paradigm is qualified as an "Industrial Company" within the definition of the Law for the Encouragement of Industry (Taxes), 1969. To the knowledge of Paradigm, there is no reason for disqualifying Paradigm from being an Industrial Company, nor would such reason arise through the conduct and performance of Paradigm's business and operations in accordance with its plans and projections (including as a result of the transactions contemplated hereby). 4.1.10 COMPLIANCE WITH LAWS. Each of Paradigm and its Subsidiaries is in compliance with all Laws and Judgments applicable to it, except where the failure to so comply could reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect, including without limitation, the provisions of the Law for Encouragement of Capital Investments, 1959, applicable to Paradigm and the terms of any "Approval Letter" issued to Paradigm thereunder and its extensions, amendments and supplements, if any. 4.1.11 DISCLOSURE. To the knowledge of Paradigm, there is no fact or facts peculiar to Paradigm or any of its Subsidiaries which Paradigm has not disclosed to CGG in writing or in the Commission Filings which could reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect. - 26 - 30 4.2 PURCHASERS' ACKNOWLEDGMENT The Purchasers acknowledge that they and their advisors have been given access to a data room organized by CGG and have reviewed to their reasonable satisfaction the documents and information listed on Schedule 4.2 (the "Data Room Documentation" (copies of which are attached to such Schedule except to the extent appearing at other Schedules)), and in entering into this Agreement, have taken into account their own review and analysis of the Data Room Documentation (it being understood that in relation to any matter covered by a representation or warranty of CGG expressly set forth in this Agreement, the Purchasers shall be entitled to rely solely upon such representation or warranty). ARTICLE V COVENANTS OF CGG 5.1 GEOVECTEUR ACCOUNTS RECEIVABLE CGG shall, and shall procure that its Affiliates shall, promptly upon their receipt from third parties of payment of amounts due to them under accounts receivable outstanding on September 30, 2000 and related to the Geovecteur Business, pay the amount thereof to Flagship on account of the corresponding Geovecteur Account Receivable. On December 29, 2000 (or if such date is not a Business Day, on the immediately preceding Business Day), CGG will pay to the Companies, without any set-off or reduction, the unpaid balance of the Geovecteur Accounts Receivable (net of reserves for doubtful accounts included in the Final Closing Balance Sheet), whereupon the Purchasers shall cause the Companies to assign all such unpaid Geovecteur Accounts Receivable to CGG. 5.2 CGG FLAGSHIP ACCOUNTS RECEIVABLE CGG shall, and shall procure that its Affiliates shall, promptly upon their receipt from third parties of payment of amounts due to them under accounts receivable outstanding on September 30, 2000 and related to the Flagship Business, pay the amount thereof to Flagship on account of the corresponding CGG Flagship Account Receivable. On March 31, 2001 (or if such date is not a Business Day, on the immediately preceding Business Day), CGG will pay to the Companies, without any set-off or reduction, the unpaid balance of the CGG Flagship Accounts Receivable (net of reserves for doubtful accounts included in the Final Closing Balance Sheet). 5.3 COVENANT NOT TO COMPETE Except as contemplated by the Umbrella Services Agreement or the Support Agreement: (i) for a period of thirty-six (36) months following the date hereof, CGG shall not, and shall procure that all of its Affiliates which it controls do not, directly or indirectly, engage in the commercial sale (i.e., through the granting of licensee) anywhere in the world of any products the same or similar to those currently included in the Flagship Business; and - 27 - 31 (ii) CGG shall not, and shall procure that all of its Affiliates which it controls do not, use commercially the names "Flagship", "Petrosystems", "Stratimagic", "Seisfacies", "GEM", "Integral Plus", "Nexmodel" and "StratQC" or otherwise simulate any of the foregoing names. CGG and the Purchasers acknowledge the fact that a part of Stratimagic (the "propagator") is included in some of the tools used by CGG or its Affiliates centers in the course of their service activity to the clients. Should any of the tools making use of the "propagator" be sold to a client (commercial sale through the granting of license) by CGG or any of its Affiliates, a royalty of U.S.$ 12,000 shall be paid to the Purchasers by CGG. It is specified that the use of the "propagator" by CGG or its Affiliates is made on an "as is" basis and that neither CGG nor any of its Affiliates will be entitled to claim support or the supply of updates to such products. CGG further undertakes to pay all third party royalties payments if and when due upon written notification by the Purchasers or the Companies. Furthermore, CGG and the Purchasers (for themselves and on behalf of the Companies) recognize that a "software development toolbox" (i.e., a set of software components; libraries, re-usables and modules which are not applications) related to and derived from GEM exists within the CGG or its Affiliates software development teams and that this software development toolbox has independently evolved during the past two years and is now significantly different. The parties nevertheless acknowledge that some similarities still exist at the level of the non-geoscience common tools (particularly drag and drop and base map). The parties expressly agree that CGG and its Affiliates will retain the entire and non restricted ownership of this software development toolbox and will therefore be entitled to further use, develop and maintain such tool box. CGG agrees not to, and shall procure that its Affiliates do not use the name "GEM" any longer in any external communication. In consequence therefore, the parties agree that any amount that may be due to the FSH will be shared equally between CGG and Flagship SA and therefore CGG will reimburse as promptly as practicable, upon presentation of appropriate documentation, half of any amount paid by Flagship S.A. to the FSH with respect to the GEM project. 5.4 LOCK-UP During the twelve-month period commencing on the date hereof, CGG and its Affiliates shall not sell or otherwise dispose of, or enter into any agreement to sell or dispose of, any of the Paradigm Shares without the authorization of the Paradigm Board, except for (i) such sales or other dispositions as may be permitted by the terms of the Registration Rights Agreement, and (ii) transfers of Paradigm Shares to Affiliates. 5.5 RECOMMENDED THIRD PARTY OFFER In the event that an third party which is not an Affiliate of Paradigm (a "Third Party") makes an offer to purchase all or substantially all of the outstanding shares of Paradigm (the "Third Party Offer"), which Third Party Offer has been approved and recommended by the board of directors of Paradigm (the "Paradigm Board"), and shareholders holding at least 75% of the outstanding Ordinary Shares of Paradigm have accepted the Third Party Offer, CGG irrevocably agrees, on behalf of itself and all of its Affiliates which it controls, to sell their Ordinary Shares to the Third Party on the terms of the Third Party Offer, provided that: - 28 - 32 (i) pursuant to the terms of the Third Party Offer, CGG and its selling Affiliates will receive cash or securities traded on a major internationally recognized stock exchange or regulated electronic trading market which are of a number and character such that they may be disposed of by CGG and its selling Affiliates on such stock exchange or regulated electronic trading market without any legal or contractual limitations within twelve (12) months of the date of receipt; and (ii) the sale of any such Ordinary Shares and/or the acceptance or receipt of any such securities would not violate any Laws or any material Contracts to which CGG or any of its selling Affiliates is subject. 5.6 RETENTION OF RECORDS CGG agrees that for a period of not less than four (4) years following the date hereof, it shall not destroy or otherwise dispose of any of the books and records of the Companies existing as of the date hereof except with the prior written consent of Purchasers, which consent shall not be unreasonably withheld. CGG agrees that it shall make available to Purchasers and their representatives and agents all such books and records, and permit Purchasers and their representatives and agents to examine, make extracts from and, at their expense, copy such books and records at any time during normal business hours for any proper business purpose. ARTICLE VI COVENANTS OF PARADIGM 6.1 GUARANTEED OBLIGATIONS The Purchasers shall cause the Companies fully to perform and observe all the obligations required to be performed and observed by the Companies under each agreement or other obligation of either of them identified on Schedule 6.1 and with respect to which CGG or any of its Affiliates is obligated as a guarantor or assignor or identified as a party thereto, and shall promptly reimburse CGG and its Affiliates for any payments made or other liabilities incurred by any of them in respect of any such obligations; provided, however, that the Purchasers shall use their best efforts to obtain the complete release and discharge of the CGG and such Affiliates from such obligations by duly executed instruments in form reasonably satisfactory to the CGG within sixty (60) days of the date hereof and, if after using such best efforts, the Purchasers are unable to obtain such release and discharge with respect to any of such obligations, the Purchasers shall thereafter cause the Companies to take all action necessary to terminate such obligation as soon as possible, including but not limited to exercising any option to prepay or purchase contained therein. Pending such complete release and discharge or termination, the Purchasers shall not permit the Companies or any of their successors to default under or amend or modify the terms of any such obligation for which CGG or any of its Affiliates could still be liable, directly or indirectly, or exercise any right to, or agree to, extend the terms of such obligation or assign or subcontract any agreement or arrangement containing any such obligation to any party. - 29 - 33 6.2 RETENTION OF RECORDS The Purchasers agree that for a period of not less than four (4) years following the date hereof, they shall not, and shall not permit any of the Companies to, destroy or otherwise dispose of any of the books and records of the Companies existing as of the date hereof except with the prior written consent of CGG, which consent shall not be unreasonably withheld. The Purchasers agree that they shall, and they shall cause the Companies to, make available to CGG and its representatives and agents all such books and records, and permit CGG and its representatives and agents to examine, make extracts from and, at their expense, copy such books and records at any time during normal business hours for any proper business purpose. 6.3 PARADIGM BOARD REPRESENTATION 6.3.1 As long as CGG and its Affiliates hold in the aggregate more than 5% of the outstanding Ordinary Shares of Paradigm, Paradigm will recommend to the shareholders of Paradigm prior to any general meeting of shareholders of Paradigm, at which directors may be proposed to be elected, to elect a representative of CGG (the "CGG Representative") to the board of directors of Paradigm (the "Paradigm Board"), and will take all lawful actions to solicit such election provided that: (i) the CGG Representative is not directly involved in any business in competition with any material businesses of Paradigm viz.: Geoscience software and data processing and interpretation; and (ii) prior to the third anniversary date of this Agreement, without the approval of the Paradigm Board, CGG and its Affiliates have not acquired additional Ordinary Shares causing them to then hold in the aggregate a percentage of the outstanding Ordinary Shares in excess of the percentage held by CGG immediately after issuance of the Paradigm Shares. 6.3.2 Paradigm will give CGG written notice reasonably in advance of the preparation of proxy materials for each shareholders meeting at which directors are proposed to be elected to permit CGG to designate a CGG Representative to be included therein as a nominee for election as a director. 6.3.3 Paradigm agrees, both for the benefit of CGG and the benefit of any CGG Representative elected to the Paradigm Board (as an express third party beneficiary of this undertaking): (i) to ensure that any CGG Representative elected to the Paradigm Board is covered by and benefits from Directors and Officers insurance to the fullest extent then applicable to any other member of the Paradigm Board; (ii) to use its best efforts to comply with the requirements of the Israeli Companies Law, 1999 with respect to the election of external directors and the appointment of a qualifying Audit Committee by no later than the shareholders' meeting at which the CGG Representative is nominated for election; (iii) to use its best efforts to amend its Articles of Association by no later than the shareholders' meeting at which the CGG Representative is nominated for election, to - 30 - 34 authorize exculpation, indemnification and insurance of its directors to the fullest extent permitted by the Israeli Companies Law, 1999; and (iv) to in all cases ensure that any CGG Representative elected to the Paradigm Board is indemnified by Paradigm for his acts or omissions as a director to the fullest extent permitted by applicable Law (it being understood that if Paradigm enters into any indemnification arrangements with any of its officers or directors, it shall be required to enter into indemnification arrangements with the CGG Representative equivalent to the most favorable treatment accorded any of its officers or directors). Paradigm shall indemnify each of CGG and any CGG Representatives for and against any Damages suffered or incurred by CGG and/or the CGG Representative as a result of any breach of Paradigm's undertakings in this Section without reference to any of the limitations set forth in Section 7.7 hereof. 6.4 SPECIAL PREFERRED SHARES Paradigm will not issue any Special Preferred Shares which currently exist in Paradigm's registered share capital, without issuing at the same time to CGG a portion of such shares issued which portion corresponds to CGG's then portion of the outstanding Ordinary Shares of Paradigm. ARTICLE VII SURVIVAL AND INDEMNIFICATION 7.1 SURVIVAL OF CGG'S REPRESENTATIONS AND WARRANTIES The representations and warranties of CGG contained in this Agreement shall survive the Closing for the benefit of the Purchasers until the second anniversary of the date hereof, except that the representations and warranties of CGG set forth in Section 3.1.5 (Taxes) and Section 3.1.17 (Employment and Labor Matters) to the extent that they relate to Taxes and Social Charges, respectively, shall survive the Closing for the benefit of the Purchasers until the third anniversary of the date hereof. If at any time prior to the relevant expiration date a Claim Notice (setting forth a factual basis sufficient to demonstrate the validity of the claim of a material inaccuracy or breach of a representation or warranty) shall have been properly delivered in accordance with the terms of this Agreement, the corresponding Claim shall survive until the time of its final determination or settlement. 7.2 SURVIVAL OF PURCHASERS' REPRESENTATIONS AND WARRANTIES The representations and warranties of the Purchasers contained in this Agreement shall survive the Closing for the benefit of CGG until the second anniversary of the date hereof. If at any time prior to the second anniversary date, a Claim Notice (setting forth a factual basis sufficient to demonstrate the validity of the claim of a material inaccuracy or breach of a representation or warranty) shall have been properly delivered in accordance with the terms of this Agreement, the corresponding Claim shall survive until the time of its final determination or settlement. - 31 - 35 7.3 SURVIVAL OF COVENANTS Except as otherwise provided in this Agreement, all covenants of CGG and the Purchasers, as the case may be, contained in this Agreement shall survive the Closing for the benefit of the Purchasers or CGG, as the case may be, indefinitely or for the period specifically specified therefor. 7.4 INDEMNIFICATION 7.4.1 OBLIGATION OF CGG From and after the Closing and subject to the provisions of this Article VII, CGG will indemnify and hold the Purchasers harmless for, and will pay to the appropriate Purchaser (as a partial repayment of the Purchase Price) the amount of, any claims, demands, actions, cause of action, damages, losses, cost, liability or expense (including reasonable legal fees, but excluding lost profits and any consequential, incidental or indirect damages) (collectively, "Damages"), which the Purchasers or the Companies may actually suffer or incur directly as a result or arising out of: (A) any non-fulfillment of any covenant on the part of CGG contained in this Agreement; (B) any inaccuracies in or breach of any of CGG's representations or warranties contained in this Agreement; or (C) any Excess Geovecteur Liabilities. From and after the Closing, the right to indemnification provided for in this Section 7.4.1 shall be the Purchasers' exclusive remedy for monetary damages for any such non-fulfillment of a covenant or inaccuracy in or breach of any representation or warranty or specific indemnity, and the Purchaser waives any other remedies that it may have (excluding specific performance). 7.4.2 OBLIGATION OF THE PURCHASERS From and after the Closing and subject to the provisions of this Article VII, the Purchasers will indemnify and hold CGG harmless for, and will pay to CGG the amount of, any Damages which CGG or CGG Americas may actually suffer or incur directly as a result or arising out of: (A) any non-fulfillment of any covenant on the part of the Purchasers contained in this Agreement; and (B) any inaccuracies in or breach of any of the Purchasers' representations or warranties contained in this Agreement. From and after the Closing, the right to indemnification provided for in this Section 7.4.2 shall be CGG's exclusive remedy for monetary damages for any such non-fulfillment of a covenant or inaccuracy in or breach of any representation or warranty, and CGG waives any other remedies that it may have (excluding specific performance). - 32 - 36 7.5 PROCEDURE FOR INDEMNIFICATION The party making a claim for indemnification under this Article VII shall, for the purposes of this Agreement, be referred to as the "Indemnified Party" and the party or parties against whom such claims are asserted under this Article VII shall, for the purposes of this Agreement, be referred to as the "Indemnifying Party". All claims by any Indemnified Party under this Article VII shall be asserted and resolved as follows: 7.5.1 CLAIM NOTICES In the event that (A) any claim, demand or Proceeding is asserted or instituted by any Person other than the parties hereto and their respective Affiliates (a "Third Party") which, if successful, could give rise to Damages for which an Indemnifying Party would be liable to an Indemnified Party hereunder (any such claim, demand or Proceeding, a "Third Party Claim"), or (B) any Indemnified Party hereunder shall have a claim to be indemnified by any Indemnifying Party hereunder which does not involve a Third Party Claim (any such claim, a "Direct Claim"), the Indemnified Party shall send to the Indemnifying Party a written notice (a "Claim Notice") specifying in reasonable detail the factual basis of such claim or demand and the amount or a good faith estimated amount of related Damages (which estimate shall not be conclusive of the final amount of such claim and demand) and such available supporting evidence as may reasonably be required by the Indemnifying Party to assess the merits of the claim and the computation or estimate of Damages. 7.5.2 TIME FOR CLAIM NOTICE The Indemnified Party shall send a Claim Notice (x) in the case of a Third Party Claim, within thirty (30) days of receipt of actual notice of such Third Party Claim (or such shorter period as may be warranted under the circumstances); and (y) in the case of a Direct Claim, with reasonable promptness in view of the circumstances (but in no event later than sixty (60) days after the Indemnified Party (including the Companies in the case of the Purchasers) first becomes aware of the facts upon which the Direct Claim is based). 7.5.3 DIRECT CLAIMS In the event of a Direct Claim, the Indemnifying Party shall have thirty (30) days following its receipt of the relevant Claim Notice (or if the amount of the Claim was not determined at the time of the Claim Notice, the date on which amount of the Claim has been notified by the Indemnified Party) (the "Direct Claim Review Period") to make such investigation of the Claim as reasonably necessary to determine the validity of the Claim. For the purpose of such investigation, the Indemnified Party shall make available to the Indemnifying Party the information relied upon by the Indemnified Party to substantiate the Claim. If the Indemnified Party and the Indemnifying Party agree at or prior to the expiration of the Direct Claim Review Period (or any mutually agreed upon extension thereof) to the validity and amount of the claim, the Indemnifying Party shall immediately pay to the Indemnified Party the full agreed upon amount of the Claim, in the event that only part of the amount of the Claim is in dispute, the Indemnifying Party shall immediately pay the full amount which is not in dispute. If the Indemnified Party and the Indemnifying Party do not reach agreement on or prior to the date of the expiration of the Direct Claim Review Period or if the Indemnifying Party notifies the Indemnified Party during the Direct Claim Review Period - 33 - 37 that it disputes its liability to the Indemnified Party in respect of the underlying Claim, setting forth the reasons for such objection, the Indemnified Party shall have one hundred eighty (180) days after the first to occur of (x) the expiration of the Direct Claim Review Period, and (y) the date it receives any such notification from the Indemnifying Party, to commence arbitration proceedings against the Indemnifying Party as provided by Section 8.7 of this Agreement. If the Indemnified Party fails for any reason (other than impossibility at law) to so commence arbitration proceedings within such one hundred eighty (180) day period, such Direct Claim will be barred and the Indemnified Party shall be deemed to have irrevocably waived its rights to pursue any other claim against the Indemnifying Party based on the same facts, events or circumstances. 7.5.4 THIRD PARTY CLAIMS (A) THIRD PARTY CLAIM REVIEW PERIOD. In the event of a Third Party Claim, the Indemnifying Party shall have thirty (30) days following its receipt of the relevant Claim Notice (the "Third Party Claim Review Period") to make such investigation of the underlying claim as it considers necessary or desirable and to notify the Indemnified Party whether or not it disputes its liability to the Indemnified Party in respect of such Third Party Claim. If the Indemnifying Party does not notify the Indemnified Party during the Third Party Claim Review Period that it disputes its liability to the Indemnified Party in respect of the relevant Third Party Claim, the Indemnifying Party shall be deemed to have acknowledged its liability to the Indemnified Party in respect of such Third Party Claim. If the Indemnifying Party notifies the Indemnified Party during the Third Party Claim Review Period that it disputes its liability to the Indemnified Party in respect of the relevant Third Party Claim, setting forth the reasons for such objection, the Indemnified Party shall have one hundred eighty (180) days after the date it receives any such notification from the Indemnifying Party to commence arbitration proceedings against the Indemnifying Party as provided by Section 8.7 of this Agreement. If the Indemnified Party fails for any reason (other than impossibility at law) to commence arbitration proceedings within such one hundred eighty (180) day period, the Indemnified Party's claim in respect of such Third Party Claim shall be barred and the Indemnified Party shall be deemed to have irrevocably waived any rights to pursue any other claims against the Indemnifying Party in respect of such Third Party Claim. (B) DEFENSE OF THIRD PARTY CLAIM. Until such time, if any, as it is determined or agreed that the Indemnifying Party has no liability to the Indemnified Party in respect of a particular Third Party Claim, the Indemnifying Party shall have the right to elect, by written notice delivered to the Indemnified Party within fifteen (15) Business Days of receipt by the Indemnifying Party of the Claim Notice from the Indemnified Party in respect of the relevant Third Party Claim, at the sole expense of the Indemnifying Party, to participate in or assume control of the negotiation, settlement or defense of the Third Party Claim, provided that: (i) such will be done at all times in a diligent and bona fide matter; (ii) the Indemnifying Party acknowledges in writing its obligation to indemnify the Indemnified Party (upon any eventual determination of its liability) in accordance with, and subject to, the terms contained in this Agreement in respect of that Third Party Claim; and - 34 - 38 (iii) the Indemnifying Party shall pay all reasonable out-of-pocket expenses incurred by the Indemnified Party as a result of such participation or assumption. If the Indemnifying Party elects to assume such control, the Indemnified Party shall co-operate with the Indemnifying Party and its counsel in the defense of such Third Party Claim and shall refrain from taking any actions which might jeopardize or interfere with its defense. The Indemnified Party shall have the right to participate in the negotiation, settlement or defense of any such Third Party Claim at its own expense. If the Indemnifying Party does not so elect or, having elected to assume such control, thereafter fails to proceed with the settlement or defense of any such Third Party Claim, the Indemnified Party shall be entitled to assume such control. In such case, the Indemnifying Party shall co-operate where necessary with the Indemnified Party and its counsel in connection with such Third Party Claim and, subject to subsection (D) below, the Indemnifying Party shall be bound by the results obtained by the Indemnified Party with respect to such Third Party Claim. (C) COUNTERCLAIM AND CROSS-CLAIM. If so requested by an Indemnifying Party and related to the claim in question, the Indemnified Party shall make (or in the case of the Purchasers, shall cause the relevant Companies to make) any counterclaim against any Person asserting such Third Party Claim or any cross-claim against any other Person which may be liable. The Indemnifying Party shall bear the cost of any such counterclaim or cross-claim, which shall not be settled without the prior written consent of the Indemnifying Party. (D) SETTLEMENT OF THIRD PARTY CLAIMS. The Indemnifying Party shall not be liable for any Third Party Claim which is settled or otherwise compromised or in respect of which any admission of liability is made without its prior written consent. In such connection, if the Indemnified Party shall receive from a Third Party or if the Indemnified Party shall propose to make to a Third Party an offer of settlement of such Third Party Claim (a "Settlement Offer"), the Indemnified Party shall notify the Indemnifying Party of such Settlement Offer promptly upon receipt thereof from the Third Party and reasonably in advance of responding thereto, or reasonably in advance of making such Settlement Offer, and shall provide with such notice all related supporting documentation reasonably required to enable the Indemnifying Party to assess the relative merits of the Settlement Offer. At the reasonable request of either of the parties, the parties will consult in good faith with respect to any such Settlement Offer. The Indemnifying Party shall then determine in the exercise of its own reasonable business judgment whether or not to consent to the Settlement Offer. If a Settlement Offer is received, which the Indemnifying Party, but not the Indemnified Party, is willing to accept, the Indemnified Party may elect to continue the defense of such claim at its own expense, in which case the liability of the Indemnifying Party shall be limited to the lesser of: (i) Damages calculated as if the Third Party Claim were settled in accordance with the proposed Settlement Offer, and (ii) the Damages actually suffered by the Indemnified Party taking into account the final determination of the Third Party Claim. The failure by the Indemnifying Party to respond in writing to a written request for consent to a Settlement Offer for a period of more than ten (10) Business Days after receipt of such request by the Indemnifying Party shall be deemed a consent by the Indemnifying Party to such request. 7.5.5 COOPERATION From and after the delivery of a Claim Notice hereunder, at the reasonable request of the Indemnifying Party, the Indemnified Party shall grant the Indemnifying Party and - 35 - 39 its representatives (including professional advisors) reasonable access to the books, records, computerized systems, employees and properties of the Indemnified Party (or of the Companies, if CGG is the Indemnifying Party) to the extent reasonably related to the matters to which the Claim Notice relates. 7.5.6 MITIGATION The Indemnified Party shall use its commercially reasonable efforts (and if the Purchasers are the Indemnified Party, they shall cause the Companies to use their commercially reasonable efforts) to mitigate any Damages resulting from any matters giving rise to a claim for indemnification under this Article VII. 7.5.7 PAYMENT No amount shall become due and payable by an Indemnifying Party to an Indemnified Party in respect of any Third Party Claim unless and to the extent that the Indemnified Party is under the obligation to immediately pay the relevant Damages to the relevant Third Party as a result of a final non-appealable judgment of a court of competent jurisdiction, a final non-appealable decision of an arbitral tribunal or a binding settlement or other agreement among the relevant parties. 7.5.8 SUBROGATION No amount shall become due and payable by an Indemnifying Party to an Indemnified Party in respect of any Claim unless the Indemnified Party shall have effectively subrogated the Indemnifying Party in all its (and the Companies', if the Purchasers are the Indemnified Party) rights against third parties in respect of such Claim. 7.6 CALCULATION OF DAMAGES 7.6.1 In calculating the amount of any Damages claimed by the Purchasers under Section 7.4.1, there shall be deducted: (i) the amount of any indemnification or other recoveries (including insurance proceeds) payable to the Purchasers or any of the Companies by any third party with respect to such Damages payment of which is not disputed by such third party, (ii) the amount of any reserve or provision included in the Final Closing Balance Sheet for Damages to which such Claim relates, and (iii) the amount of any corresponding Tax savings or benefit (including any Tax reduction, credit, or loss carry-back or carry-forward) (a "Tax Benefit") which is or will be available to the Purchasers or any of the Companies in respect of any taxable period. 7.6.2 For purposes of computing the amount of any Damages which an Indemnifying Party may be required to pay hereunder, only the Damages actually sustained by CGG, the Purchasers or the relevant Company shall be taken into account, to the exclusion of any price/earnings or similar multiplier implicit in the Purchase Price. 7.6.3 If at the time that a Claim is made by a Purchaser or a payment is required to be made by CGG in respect of any Damages suffered or incurred by the Companies, the availability or the amount of any corresponding Tax Benefit cannot be determined with reasonable certainty, the potential Tax Benefit shall not then be taken into account in the computation of the amount of Damages payable by CGG and any required payment shall not - 36 - 40 be delayed. Thereafter, the Purchasers shall cause the Companies to notify CGG with reasonable promptness whenever a Tax Benefit is claimed by or on behalf of the Companies (or their tax group) or its availability becomes reasonably certain as a result of the Damages suffered or incurred by the Companies relating to such Claim, which notice shall indicate the amount of such Tax Benefit. CGG shall also have the right, at any time after a Claim is made in respect of which the availability of the Tax Benefit of the corresponding Damages cannot be determined with reasonable certainty, to require that its auditors be given reasonable access to the relevant accounting and tax records of the Companies to determine the availability and amount of any such Tax Benefit. 7.6.4 In the event that the amount of any deduction referred to in this Section 7.6 is determined only after payment by CGG of the amount otherwise required pursuant to this Article VII, Paradigm shall repay to CGG promptly after such determination any such payments that CGG would not have had to make pursuant to this Article VII had such determination been made at or prior to the time of such payment. 7.6.5 In calculating the amount of Damages claimed by CGG under Section 7.4.2, there shall be deducted therefrom the amount of any Tax Benefit which is or will be available to CGG in respect of any taxable period (following the same principles and procedures set forth in Section 7.6.3 as if CGG were the Purchaser and the Purchaser were CGG), provided that the payment made in respect of the corresponding Claim is not taxable to CGG. 7.7 ADDITIONAL RULES AND PROCEDURES The obligations of CGG and the Purchasers to indemnify each other pursuant to this Article VII shall also be subject to the following limitations and exclusions: 7.7.1 An Indemnified Party shall only be entitled to make a Claim pursuant to this Article VII in respect of a representation or warranty contained in this Agreement if a Claim Notice is properly given within the time periods provided for in Sections 7.1 and 7.2, as the case may be; 7.7.2 No Claim may be made by the Purchasers or CGG, and no amount shall be due by CGG or the Purchasers in respect of any such Claim, unless and only to the extent that after application of the provisions of this Article VII: (A) the amount of Damages in respect of which the relevant party is entitled to be indemnified as a result of any individual claim exceeds $50,000; and (B) the cumulative and aggregate amount of all Damages in respect of which the relevant party is obligated to indemnify the other party under the preceding clause (A) exceeds $250,000. Notwithstanding the foregoing, as between the parties, the foregoing limitations constitute deductibles and CGG, on the one hand, and the Purchasers, on the other hand, shall be liable to indemnify each other only for Damages in excess of such amounts. 7.7.3 (A) Except for those circumstances where CGG has made any fraudulent or intentional misrepresentation or breach with respect to any of its representations, warranties, agreements or covenants contained in this Agreement, and notwithstanding any - 37 - 41 other provision in this Agreement, in no event shall the aggregate amount of Damages for which the Purchasers (collectively) may claim hereunder, and for which CGG may be liable, exceed Seven Million US Dollars (US$7,000,000). (B) Except for those circumstances where any of the Purchasers has made any fraudulent or intentional misrepresentation or breach with respect to any of its respective representations, warranties, agreements or covenants contained in this Agreement, and notwithstanding any other provision in this Agreement, in no event shall the aggregate amount of Damages for which CGG may claim hereunder, and for which the Purchasers (collectively) may be liable, exceed Five Million US Dollars (US$5,000,000). 7.7.4 No claim in respect of Taxes shall entitle the Purchasers to indemnification if it corresponds to a mere change in the time when a Tax should have been paid or if such Tax can effectively be deducted or recovered by the relevant Company (except that the Purchasers shall be entitled to be indemnified in accordance herewith for any resulting interest charges or penalties for late payment). 7.7.5 CGG shall have no liability to the Purchasers for Damages which arise as a direct result of: (w) any act or omission of the Purchasers or the Companies having as its purpose the precipitation of a claim for indemnification hereunder, (x) any changes in accounting methods or policies, (y) the granting of any extensions or waivers with respect to any statute of limitations applicable to claims which might be made against the Purchasers or the Companies, or (z) the passing of, or any change in, after the Closing, any Law or administrative practice of any Governmental Authority in any such case not actually in force at the date of this Agreement (even if retroactive in effect), including, but not limited, to any increase in the Tax rates in effect on the date hereof or imposition of any Tax not in effect on the date hereof. 7.7.6 Notwithstanding anything in this Agreement to the contrary, a claim for Damages resulting from an inaccuracy or breach of the representations and warranties of CGG set forth in Sections 3.1.14 and 3.1.17 (even if such inaccuracy or breach could also constitute an inaccuracy or breach of any other representations and warranties of CGG set forth in this Agreement) shall give rise to an indemnification obligation under this Article VII only if it is based on a successful Third Party Claim duly and timely notified to CGG. 7.7.7 Neither CGG, on the one hand, nor the Purchasers, on the other hand, shall be required to indemnify any other more than once on account of the same facts, matters or circumstances, and neither CGG, on the one hand, nor the Purchasers, on the other hand, shall be entitled to make any claim for indemnification in connection with Damages arising out of or resulting from facts or circumstances of which it was aware at the time of Closing. 7.8 TREATMENT OF CGG'S INDEMNIFICATION PAYMENTS. Notwithstanding the use of the term "indemnification" herein with respect to CGG's obligations under this Article VII, the parties agree that any payments made by CGG or received by the Purchasers pursuant to this Article VII shall be deemed to constitute a partial repayment and adjustment of the Purchase Price, and agree to treat (and to cause their Affiliates to treat) any such payments as a partial repayment of the Purchase Price for all tax, accounting and financial reporting purposes. - 38 - 42 ARTICLE VIII GENERAL 8.1 BROKERS AND FINDERS 8.1.1 CGG represents and warrants to the Purchasers that neither it nor either of the Companies has employed the services of an investment banker, financial advisor, broker or finder in connection with this Agreement or any of the transactions contemplated hereby. CGG indemnifies and agrees to defend and hold the Purchasers and each of the Companies harmless against and in respect of all claims, losses, liabilities and expenses which may be asserted against the Purchasers (or any Affiliate of the Purchasers) by any Person who claims to be entitled to an investment banker's, financial advisor's, broker's, finder's or similar fee or commission in respect of the entering into of this Agreement, or the consummation of the transactions contemplated hereby, by reason of his acting at the request of CGG or either of the Companies. 8.1.2 The Purchasers represent and warrant to CGG that they have not employed the services of an investment banker, financial advisor, broker or finder in connection with this Agreement or any of the transactions contemplated hereby. The Purchasers indemnify and agree to save and hold CGG harmless against and in respect of all claims, losses, liabilities, fees, costs and expenses which may be asserted against it by any Person who claims to be entitled to an investment banker's, financial advisor's, broker's, finder's or similar fee or commission in respect of the entering into of this Agreement or the consummation of the transactions contemplated hereby, by reason of his acting at the request of the Purchasers. 8.2 RECOURSE 8.2.1 No past, present or future director, officer, employee, shareholder or Affiliate, as such, of CGG or either of the Purchasers shall have any liability under this Agreement for any of the obligations of CGG or the Purchasers, respectively, under this Agreement or for any claim based on, in respect of or by reason of such obligation. 8.2.2 The Purchasers shall be jointly and severally liable for all representations, warranties, covenants, undertakings and other obligations of any of the Purchasers set forth in this Agreement. 8.3 NOTICE All notices required or permitted by this Agreement shall be in writing and delivered by hand or sent by telecopier to: The Purchasers: Paradigm Geophysical Ltd. Gav-Yam Center No. 3 9, Shenkar Street P.O. Box 2061 Herzliya B 46120, Israel Fax Number: (09) 970-9337 ATT: Chief Executive Officer - 39 - 43 With a copy (which will not be considered notice) to: Efrati, Galili & Co., Law Offices 6 Wissotsky St., Tel Aviv 62338 Fax Number: (972) (03) 604 0111 ATT: Ian Rostowsky, Adv. and with a copy (which will not be considered notice) to: Phillipe Ginestie, Adv. Ginestie, Paley-Vincent & Partners 10 Place des Etats-Unis 75116, Paris, France Fax Number: (33) 1 53 23 97 00 CGG: Compagnie Generale de Geophysique 1 rue L'on Migaux 91302 Massy Cedex, France Fax Number: (33) 1 64 47 39 87 ATTN: Directeur G'n'ral Adjoint-Produits and with a copy (which will not be considered notice) to: Compagnie G'n'rale de G'ophysique Tour Montparnasse 33, avenue du Maine B.P. 191 75755 Paris Cedex 15, France Fax Number: (33) 1 64 47 34 29 ATTN: Legal Division or at such other address or fax number of which the addressee may from time to time have notified the addressor. A notice shall be deemed to have been sent and received on the day of actual receipt. If such day is not a Business Day, or if the notice is received after ordinary office hours (time and place of receipt), the notice shall be deemed to have been sent and received on the next Business Day. 8.4 COSTS Except as otherwise provided in this Agreement, each party shall be responsible for its own fees, expenses, and other costs incurred in connection with the purchase and sale of the Securities and the other transactions contemplated hereby. 8.5 TIME OF THE ESSENCE Time is of the essence to every provision of this Agreement. Extension, waiver or variation of any provision of this Agreement shall not be deemed to affect this provision and there shall be no implied waiver of this provision. - 40 - 44 8.6 FURTHER ACTS The parties shall use its reasonable commercial endeavors to take, or to cause to be taken, all such further actions and to do, or to cause to be done, all such additional things as may be necessary or desirable, consistent with applicable Laws, to give full effect to this Agreement. 8.7 ARBITRATION AND GOVERNING LAW 8.7.1 Except as provided in Section 2.5, all disputes, controversies and claims (whether legal or equitable) arising out of or in connection with this Agreement shall be finally settled by arbitration under the new Rules of Arbitration of the International Chamber of Commerce as set forth in the ICC Publication no. 581, by one or three arbitrators having experience in commercial matters and appointed in accordance with said Rules. The arbitrator shall not be a French or Israeli national. The exclusive forum and venue to resolve all disputes, controversies and claims shall be Paris, France. The proceedings shall be conducted in the English language. The costs of the arbitration shall be borne as directed by the arbitrators. The arbitrators will give written reasons for any decision issued by the panel. The parties shall have recourse to the courts of any jurisdiction only to enforce the arbitral decision and to enforce this exclusive forum provision. 8.7.2 This Agreement shall be governed and construed in accordance with the laws of the State of New York, without regard to conflicts of law rules. 8.8 AMENDMENT This Agreement may be amended only by the express written agreement of the parties. 8.9 WAIVER No waiver of any provision of this Agreement shall be binding unless it is in writing. No indulgence or forbearance by a party shall constitute a waiver of such party's right to insist on performance in full and in a timely manner of all covenants in this Agreement. Waiver of any provision shall not be deemed to waive the same provision thereafter, or any other provision of this Agreement at any time. 8.10 ENTIRE AGREEMENT 8.10.1 This Agreement and the documents referred to in it contain the whole agreement between the parties relating to the transactions contemplated by this Agreement and the documents referred to in it. This Agreement supersedes all prior negotiations, discussions, correspondence, communications, understandings and agreements between the parties relating to the subject matter of this Agreement and all prior drafts of this Agreement. No prior drafts of this Agreement and no words or phrases from any such prior drafts shall be admissible into evidence in any dispute or Proceeding involving this Agreement. 8.10.2 Each of the parties acknowledges that in agreeing to enter into this Agreement and the documents referred to in it, it has not relied on any representation, warranty, collateral - 41 - 45 contract or other assurance except those set out in this Agreement provided that nothing in this Agreement shall limit or exclude any liability for fraud. 8.10.3 All Schedules are part of the present Agreement, and any matter disclosed in any Schedule shall be deemed disclosed for all purposes of this Agreement (notwithstanding the absence of any specific cross-references in the Schedule or Section in question). 8.11 SEVERABILITY If any provision of this Agreement is invalid or unenforceable, such provision shall be severed and the remainder of this Agreement shall be unaffected thereby and shall continue to be valid and enforceable to the fullest extent permitted by law. 8.12 COUNTERPARTS This Agreement may be executed in one or more counterparts (by original or facsimile signature) which, together, shall constitute one and the same Agreement. This Agreement shall not be binding upon any party until it has been executed by each of the parties and delivered to all other parties. 8.13 ASSIGNMENT 8.13.1 Neither this Agreement nor any rights or obligations hereunder may be assigned, directly or indirectly, by any party without the prior written consent of the other parties. Any unauthorized assignment without such consent shall be null and void. 8.13.2 Notwithstanding the foregoing, the Purchasers may assign all or part of their rights under this Agreement to an Affiliate which remains at all times controlled by Paradigm, provided that: (x) the Purchasers shall remain fully liable for the performance of all of their respective obligations hereunder in the manner prescribed by this Agreement, (y) no such assignment shall be valid unless and until duly notified to CGG by an instrument of assignment signed by the Purchasers and the beneficiary of the assignment and (z) under no circumstances shall the obligations or liabilities of CGG be increased as a result of such assignment. 8.13.3 Upon any merger, or any conveyance or transfer of the properties and assets of a party substantially as an entirety , the successor corporation into which a party is merged or to which such conveyance or transfer is made shall succeed to, and be substituted for, and may exercise the rights of, such party under this Agreement with the same effect as if such successor corporation had been named as the party herein; provided, however, that no such conveyance or transfer shall have the effect of releasing any party or any successor corporation which shall theretofore have become such in the manner prescribed in above from any of its obligations or liabilities hereunder or increasing the obligations or liabilities of any other party. 8.14 BENEFIT This Agreement shall inure to the benefit of and be binding upon the parties hereto and their respective successors and permitted assigns. Except as expressly provided herein, this Agreement and all of its provisions and conditions are for the sole and exclusive benefit - 42 - 46 of the parties to this Agreement and their successors and permitted assigns, and nothing expressed or referred to in this Agreement will be construed to give any Person other than the parties to this Agreement any right, remedy or claim under or with respect to this Agreement or any provision of this Agreement. - 43 - 47 IN WITNESS WHEREOF, the parties have duly executed this Agreement as of the date first written above. COMPAGNIE GENERALE DE GEOPHYSIQUE By: /s/ Robert Brunck ---------------------------- Name: Robert Brunck Title: PARADIGM GEOPHYSICAL LTD. By: /s/ Eldad Weiss ---------------------------- Name: Eldad Weiss Title: C.E.O. PARADIGM GEOPHYSICAL CORP. By: /s/ Eldad Weiss ---------------------------- Name: Eldad Weiss Title: C.E.O. - 44 - EX-99.8.1 4 y50410ex99-8_1.txt SUBSIDIARIES 1 PARADIGM GEOPHYSICAL LTD. SUBSIDIARY COMPANIES (including wholly owned subsidiaries of subsidiaries).
COUNTRY OF COMPANY NAME INCORPORATION - ------------ ------------- Parent Company Paradigm Geophysical Ltd. Israel Subsidiaries Paradigm Geophysical Corp. United States Paradigm Geophysical (R.&.D) Corp. United States Paradigm Geophysical Canada Ltd Canada Paradigm Geophysical (UK) Limited UK Paradigm Geophysical Europe Limited UK Paradigm Geophysical Services Limited UK Paradigm Geophysical Pte Ltd Singapore Paradigm Geophysical Pty Ltd. Australia PT Paradigm Geophysical(Indonesia) Indonesia Paradigm Geophysical BV The Netherlands Paradigm Geophysical de Venezuela C.A. Venezuela Paradigm Geophysical S.A. Argentina Paradigm Geophysical do Brasil LTDA Brazil Paradigm Geophysical Holdings EURL France Paradigm Geophysical(France) S.A. France Paradigm Geophysical(Hungary) Group Financing LLC Hungary
Representative Offices Paradigm Geophysical Ltd. - Beijing Representative office Paradigm Geophysical Europe Limited - Moscow Representative Office Paradigm Geophysical Services Limited - Moscow Representative Office Paradigm Geophysical (UK) Limited - Bahrain Representative Office Paradigm Geophysical BV - Almaty Representative office EX-99.10.1 5 y50410ex99-10_1.txt CONSENT OF KOST FORER AND GABBAY 1 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statement (Form S-8 No.333-70047), pertaining to the Key Employee Plan, May 1994 Stock Option Plan, 1994 General Stock Option Plan, 1997 Stock Option Plan for Qualifying Israel Employees, 1997 Executive Stock Option Plan and 1997 Stock Option Plan for U.S. Employees, of our report dated January 22, 2001, with respect to the consolidated financial statements of Paradigm Geophysical Ltd. included in this Annual Report (Form 20-F) for the year ended December 31, 2000. /s/ Kost, Forer and Gabbay Tel-Aviv, Israel KOST, FORER and GABBAY June 28, 2001 A member of Ernst & Young International -----END PRIVACY-ENHANCED MESSAGE-----